Tuesday, November 3, 2015

Triplets and the Tax Reform Blues

The WSJ on October 29th  featured an article by Republican Candidate Ted Cruz about tax reform. Cruz joins Jeb Bush and some of the other candidates in laying out thoughtful pro-growth tax reforms. We will be seeing more and more of these as we approach the coming presidential election.

While there is much to discuss and debate about the particulars of these tax reform plans, today’s blog post is more about the elephant in the room. Somehow these serious attempts to reform taxes and promote economic growth avoid or miss some important consequences and therefore make it very easy for the opposition to demagogue such plans.

It is no secret that income distribution and the national debt are twin ticking time bombs. Yet none of these tax reforms advance any serious if debatable discussions about how tax reforms might impact these issues. Democrats can’t do a sit-up without lamenting what has happened to the income distribution. Whether you agree with their policies or not, many of us wonder how long the economy can tolerate this apparent dislocation of wealth away from the poor to the rich. Clearly we do not want to be responsible for policies that exacerbate this widening gulf. But this is red meat for Democrats every time a Republican offers a tax reform program that skirts this issue. I don’t think Cruz’s recent article said one word about the effects of his program on income distribution.

Why? Perhaps it is because he wants us to assume that his plan will improve the situation. Economic growth lifts all boats. I agree with that statement but like many economic truths it is contingent. The truthfulness of it is related to other things happening in the economy. Doing push-ups is good for you. Give me 20. It will make you stronger and happier and sexier. But coach, I have a broken arm! Oops…maybe you should not do any push-ups right now.  So Cruz and the other tax reformers owe us a serious explanation for why their policies will not worsen and might even improve income distribution. If they don’t do it themselves – this leaves a lot of room for Democrats to make up outrageous stories. I can just see Hillary right now explaining how a flat tax is going to save billionaires zillions of dollars while the poor guy gets enough to buy a lottery ticket.

The other elephant in the room is national debt. Advocates of tax reform plans resemble the cheesy used car salesman promising that if you buy this plan you will grow hair and sleep through the night without one trip to the lavatory. As in the income distribution discussion, these Rs are whistling and crossing their fingers behind their backs while promising that a flood of tax revenues will flow over the dam. Lower tax rates mean tax revenues will jump higher than Michael Jordan on a trampoline. If debt is a problem, then these Rs need to do their homework and do some serious calculating about tax reform and debt. I would rather have them arguing about specific assumptions and elasticities than be such easy prey for the Ds. Silence is not golden.

Of course there is another approach that can work. Maybe Cruz and his playmates should admit that tax reform might not have a positive impact on the distribution of income and the debt. What? Larry are you nuts? Probably. But here is my point. The income distribution did not get out of whack easily. Maybe some serious thinking about the real causes of a poor income distribution would result in a serious policy aimed directly at those problems. Admit that tax reform is about growth. Tax reform cannot brush your teeth and walk your dog. An honest discussion and feasible policies to improve income distribution could go a long way politically.

The same goes for debt. Tax reform does not have to impact debt if it is tax neutral. It is a slam dunk that debt is not the result of deficient taxes but results from an incessant desire for government to spend more and more. Don’t hang your tax reform hat on the debt. Admit it has little to do with the nation’s crushing debt. And then have a separate program that goes after runaway spending. If you don’t think spending is running away just read my recent post “US Government: Liars and Thieves.“  Since I wrote it Congress decided to add another $80 billion on top of what was already a generous trajectory for spending.

So there you are. Tax reform is needed but it doesn’t stand a chance of passing if the good guys don’t couple it with serious approaches to income distribution and national debt. It is too easy to sabotage tax reform if nothing is said about these evil sisters. We might think about triplets. 


  1. I have to ask...who are the good guys.

    Tax or not tax has had little impact on the serious loss of middle class jobs. We have ranted about this before. Automation, digital products that do everything but give you a good Hmmm Job have been major contributors along with labor force increases in quantity but not participation. Tax plans will not solve these issues and neither will government programs. It is a new world we have rapidly with great smiles about our I phones, have entered. When is the last time you placed a call for a service, product or other things you want or need and got a person ...even after punching the right numbers. When is the last time you actually found a true sales person in a retail store or bought services from the provider and not a broker.

    Joni Mitchell has a song about paving paradise.... I would like to slightly change the words to fit today's climate..."pave paradise put up a cell tower...not that I phones are bad but they are the poster child of what is happening and will continue to happen. Tax issues are a political cop out. We need better leadership that understands where we are heading.

    1. Thanks Jim. I would not call tax issues a cop out. There are plenty of reasons to reform the tax code. But tax reform will not solve all problems as you say and unless done carefully could exacerbate other indicators like the debt and distribution on income.

  2. Dear LSD. Lower taxes and supply-side econ have not proven to singularly result in jobs, higher wages/income, and reduction of income disparity—not to mention debt reduction. I believe, rather, that they set the table for job creation/economic growth—and eventually debt reduction—let the private sector do its thing without head winds created by a big govomit fan. The solutions are not just lower rates but reform that eliminates most subsidies, exemptions, and loopholes—and elimination of many counter-productive rules and regs—TBD. That’s on the public/policy side.

    On the private/individual side individuals and the education industry must get right with pursuit of education and skills (including the trades) that will promote effective performance in the jobs of the future—not just any jobs but good-paying jobs. To attain that outcome individuals, families, and education must consensus on what those jobs will be, adapt behaviors (and eliminate behaviors that retard success in the adult world) and environment to incent completion of high school/higher education directed to those potential income gap reduction jobs. Education is positively correlated (but not singularly causal) to income and wealth creation.

    If these measures happen we could see some incremental improvement in tax revenues; but without actual real reduction in govomit spending—not just reductions in rates of spending increases—debt reduction will be unrealizable.

    I think that’s the message that Cruz et al should take to the voters. Tough love—not free love as per the Ds.