Trump and Republicans don't always agree, but they do on tax cuts.

On the Tax Cuts and Jobs Act of 2017

Political Pen Pals is a series that aims to demonstrate civil discourse through the publishing of policy debates between individuals who disagree. See more Political Pen Pals debates here.

Dear Joe,

Political arguments over economic matters can easily become “my statistics are better than your statistics.” You can prove any side of an argument if you rummage around in the data and find an aggrieved party, show how they have benefited less than some other party, and negate the overwhelming good of the matter at hand.  This is the genesis of the lame claim that the tax cuts are “crumbs.”

The statistics in favor of tax cuts, however, are stunning. My favorites are the historically low unemployment rate for African Americans and Hispanics. In my opinion, that proves the value of the tax cuts. If the most disadvantaged ethnic groups in the land are doing well, we have succeeded.

But rather than argue statistics, I prefer to make my argument on economic first principals. I will ask the question, “What overarching economic policies result in the most economic progress for the most people?”

Let’s define economic progress using standard available measures. I would offer the following list: higher growth, lower unemployment, increased job creation, increased business creation, higher company profits, rising stock values, fewer people on assistance, and higher material quality of life.

All these measures have improved following the Tax Cuts and Jobs Act of 2017. There is no linear relationship between these statistics and the tax cuts because economics are influenced by many things happening at once. For example, the dramatic reduction in business regulation also contributed to the improved economy.

Here is my theory on why tax cuts improve the economy. First, let’s turn to Adam Smith, who was one of the first to write about the effects of capitalism. Smith lived in Glasgow, Scotland. Glasgow was poor and drab with no arts and culture to speak of. Some investors got together, pooled their funds, bought ships and sent them to Virginia. The ships came back loaded with tobacco which they sold in Europe. The investors got very rich. Smith noticed later that everything was better in Glasgow. There were silversmiths, printers and bookbinders, musicians and orchestras, beautiful houses, well-dressed people and a general improvement in well-being all over Glasgow.

I have lived in Bellevue, Washington, since 1979. In that year, shopping in Bellevue consisted of a JCPenney and a few other stores. I’ve seen the same thing happen in Bellevue that happened in Glasgow since Microsoft, Amazon, Starbucks and other world-leading companies set up headquarters in my area. Today in Bellevue the Bentley, Rolls, Porche and Jaguar dealers are almost on the same block. Even the most rudimentary 1950s era house is worth many times what the owner paid for it ten or twenty years ago. Capitalism worked in Glasgow and it works everywhere.

Now let’s look a little deeper at why this happens. In George Guilder’s book, Knowledge and Power, Guilder outlines what makes an economy grow. As the title states, it takes a marriage of knowledge and power, or stated another way, a person with an idea and another person with the money to make it a business. Jeff Bezos had the idea but to scale up to the Amazon.com that we know today, he had to have other people’s money, and lots of it. He needed capital to dominate ecommerce the way he has. Lots of people have ideas, some of them viable and disruptive, but without capital they die of neglect.

It is said that no one ever got hired for a job by a poor person. Wealthy people invest in new ideas and foster businesses that create jobs. Let’s be clear what the role of the capitalist is in growing the economy. People that know how to make money, and hence are wealthy, are wise and know where to allocate their funds to make more money. That ensures that a high percentage of new businesses will prosper, and that creates jobs. The fulcrum of wealth creation and jobs is the capitalist. The capitalist knows where to allocate resources. Misallocation of resources is precisely why big government and socialism always fail.

Tax cuts, both the individual and corporate tax cuts, put more money in the hands of capitalists, the people who provide the mother’s milk of economic flourishing. Economic growth is the key to prosperity not just for the capitalist, but for all levels of society.

America is the world’s greatest engine of growth. That Jeff Bezos is the new world’s richest man yearns me not, as Shakespeare might say. He is starting his own space program, with or without NASA and the US Government. Bless him. He is rich, but he is a genius at growing the economy and jobs. More power to him.

Notice what is missing from my analysis. Income inequality is a social argument and not relevant to economics. Down deep, it is the politics of envy, and we need none of that. The politics of envy make us all poorer.

We need capitalists. If some get rich, we’re all better off. So three cheers for the tax cuts. America is a much better place.

Robert


Dear Robert —

Thanks for your letter. You make a convincing argument in favor of the Tax Cuts and Jobs Act on first-principles. I agree with much of your analysis.

I would be remiss, however, if I did not push back on at least a couple specific arguments. You argue that we can declare the tax cuts are working because “the most disadvantaged ethnic groups in the land are doing well,” citing historically low unemployment rates among minorities. This argument is overly simplistic. The fact of the matter is that unemployment among African Americans and Hispanics has been in decline since after the financial crisis of 2008 and is in large part, if not primarily, a result of economic policies from the Obama Administration. Some credit might be owed to the Tax Cut and Jobs Act, or the Trump Administration’s deregulation efforts, but these have only been taking place over the past year and have at best continued the positive trend.

Second, I want to acknowledge that I believe in the importance of the capitalist. Investors and entrepreneurs are the lifeblood of economy. They create jobs, businesses, and industries. Had the tax bill included provisions that gave tax breaks to incentivize investment and job creation in the US, I might have been more supportive. Individuals and companies store money offshore and outsource production abroad, and insofar as a given reform to the tax code can incentivize them to bring that wealth back to the US, then it is a good thing for our country. But the tax bill leaves this to chance, instead of providing incentives or closing loopholes it simply slashes tax rates for the wealthiest Americans and businesses. You argue that inequality is not an issue in the United States. I disagree, as 40 million Americans live in poverty and the top 1% of Americans owns one third of the wealth. How, I ask, does the doubling of income exemptions under the Estate Tax, which allows wealthy families to keep more of their money across generations, contribute to a “rising tide” that lifts all boats?

To your broader point, though, I would agree with much of the argument that Capitalism “works.” I would go as far as to argue that it is the greatest force for the promotion of prosperity, liberty, and security in human history. But Capitalism is not perfect. If Democracy is the worst form of government except for all the others, Capitalism is the equivalent in terms of financial systems. I fall into the Keynesian tradition that believes in government intervention in markets when required. Markets do not work perfectly. There are recessions and depressions in the business cycle. The 2008 Financial Crisis is a perfect example. Strong government intervention through fiscal stimulus unequivocally reduced the impact of the Great Recession. Inequality is another area. Capitalism tends to accumulate wealth in the hands of the capitalists, which does serve a purpose, but can also leave other people behind. A just amount of income redistribution is necessary though the taxation of wealthier citizens.

In regards to the Tax Cuts and Jobs Act specifically, I will ignore the many process fouls of the legislation, including the fact that the bill was passed along parties lines in the middle of the night without the regular legislative process allowing for committee hearings and public comment. But I cannot ignore the significant amount of misleading that occurred during the (limited) debate around the bill and afterwords, including the argument that the bill was in any way tax “reform.” We were promised we could fill out our taxes on a post card! Yet there were minimal simplifications of the tax code or closing of tax loopholes. This was a tax cut, plain and simple.

The principle offense, however, was the claim that this bill was a tax cut for the middle class. Even with a doubling of the standard deduction many middle class families, especially in blue states, will see taxes stay the same or increase slightly under the bill. These effects are exacerbated with time, with most middle and low income families facing tax increases from current levels in the next ten years as the individual tax cuts expire. 

There may be a legitimate argument to reducing the corporate tax rate if it makes American businesses more competitive (although with current loopholes American companies are already effectively paying globally competitive rates). However, the Republicans demonstrated compete lack of principle by abandoning any sign of fiscal discipline–something they claimed to have cared about during the Obama administration–due to the impact the bill will have on the debt and deficit. The Tax Cuts and Jobs Act will add at least $2 trillion dollars to the federal debt at time when the economy is thriving. Keyneysians believe in government intervention in tough times. This is not what we are talking about here. This bill is unnecessary and reckless government intervention of the worst kind—patronism. And patronism that will, over time, increase the federal deficit and debt such result in larger interest payments on the debt that will, ironically, force tax increases. In the words of our President: SAD

J


Dear Joe —

There are two issues from your response I will address. First, since you challenged my argument based on economic data, I ask: is your argument logical and supported by evidence? Second, we should examine the question of taxation in a more general way to arrive at an understanding of how taxation is justly imposed on the citizenry in order to strengthen the country and enlist the citizens to support the American Project with pride and commitment.

In the first question takes us to your statement at the top: The fact of the matter is that unemployment among African Americans and Hispanics has been in decline since after the financial crisis of 2008 and is in large part (if not primarily) a result of economic policies from the Obama Administration.

Your statement incorporates two fallacies. The 2008 recession was the worst since the great depression. As we know, all unemployment has been in decline since the financial crisis of 2008, not just African American unemployment. Unmployment had nowhere to go but down, and you don’t state and probably don’t know which part of that was to the benefit of African Americans any more than any other group. Also, you said unemployment declined because of the policies from the Obama Administration, but you offer no examples or evidence. What policies?

Which Obama policies drove down African American unemployment? Was it crippling regulation, especially of banks? Was it higher taxes? Was it putting more people on longer unemployment and more people on food stamps? Was it a runaway EPA cutting entire industries off at the knees, such as the oil and coal industries? Was it overregulation that stifled new business creation and created the lowest number of IPO’s and new banks in, perhaps, our history? Exactly what policies do you mean? If you say it’s TARP and fiscal stimulus, those began under Bush. Obama can’t take credit for programs already in place when he took over the White House.

Arguments about process fouls and “doing your taxes on a postcard” are quibbles and irrelevant, as is question of was this tax “reform.” The 2017 tax bill was uncontrovertibly the most extensive reform since the Reagan Reform of 1986, 36 years and six presidents ago. These are all petty “snarks and barks” generated by the Trump haters at CNN and NPR. The idea that Trump is motivated by “patronism,” governing to profit his friends, is also a product of the unrelenting personal attack on Trump by a media that gets up each morning looking for new tactics to destroy this president.

Let us turn now to the general question of taxation and fairness. George Gilder has said that the only constant in finance and money is time. (See Knowledge and Power by George Gilder.) Similarly, our taxes can be measured against time. How many hours, days and months do you have to work to pay your taxes? Working for someone else without pay is slavery, pure and simple. If we submit to slavery for the general good, it better be for a common purpose and it better be worth the implied bargain.

It ought never to be for increasing the power of a political class, for spending government money on unnecessary projects to win votes. It ought never to be for sustaining people so well and for so long it robs them of their ability and will to sustain themselves—and robs them of their dignity. It ought never to be for perquisites and luxuries to public officials, or for hiring thousands of unnecessary government employees.

Now let’s address who should pay. The French Revolution was driven by unfair taxation of the opposite type. The nobility was exempt from taxes and the Bourgeoise took one of thousands of administrative posts to gain their own exemptions. Taxes fell entirely on the necks of the poor. The rich were able to force the poor into corvés, work gangs with no wages. The poor were made to build roads to the estates of the nobility which were of no benefit to them. Working on forced labor took away their time and made it even harder for them to pay the taille, or the head taxes. The revolution was inevitable.

Tax fairness matters. Since the top 5% of US income earners pay 60% of the taxes collected, it is absurd to say our system is unfair to the poor and the middle class. The bottom 50% of American earners pay 3% of the taxes collected.

If anything, the opposite is true. As in the case of the French in 1789, unfairness will ultimately be payed back in unrest. When there are too many with “exemptions,” the idea of unity of citizens as one nation disintegrates, and classes vilify and disregard the needs of other classes, just as they did in France. No one in pre-revolutionary France had any regard for anyone else except themselves and their own, which is why the revolution was so vicious. (See The Ancien Régime and the French Revolution by Alexis de Toqueville.) Therefore, it is necessary to tax virtually everyone with an ability to pay at least enough that they feel a responsibility toward the management and welfare of the nation. To do otherwise creates a class of citizens who become used to support from the government without contributing, for living off the state as plebeians did in Imperial Rome. That eventually brought down the state.

With this in mind, it is shortsighted and foolish to complain that the tax bill did not do enough for the middle class. The tax bill affected everyone, fairly, I think, and that is best if we want to preserve our national unity.

Robert


Dear Robert —

I don’t want to get lost down this rabbit hole, but I wanted to provide a quick response to your critique of my assertion that the Obama Administration is primarily responsible for the record low unemployment of African Americans and Hispanics. Recall, first, that this point was in response to your claim that the historically low employment of these disadvantaged groups was proof of the value of the Trump tax cuts. The burden of proof is, first and foremost, on you to show how the Trump tax cuts deserve this credit. I concur that a large part of this statistic is the continuation of a trend that began after the financial crisis of 2008, as you point out. However, you seem to want to have it both ways, asserting that African Americans and Hispanics are doing well both because of the continuation of an existing trend and because of the Tax Cuts and Jobs Act.

My argument is simply that African Americans and Hispanics unemployment went down more significantly during the Obama Administration.  Which policies you ask? The “fiscal stimulus,” for one, which included a $152b bill signed by President Bush but then a larger $787b bill signed by President Obama. (Both passed by a Democratic Senate and House, I might add). There are countless other influences on the economy by a President’s administration from annual budgets—which include investments in education, R&D, welfare, and healthcare, all of which result in economic benefits—as well as presidential appointees to key cabinet positions including Secretary of Treasury, Commerce, Trade Representative, etc. This is the summation of everything that a President’s Administration is and means. As you say, economics are “influenced by many things happening at once.” I agree and thus repeat my argument that attributing the success of certain ethnic groups or to specific piece of legislation, particular after such a short time after passage, seems like a dubious proposition to me, at best.

But as this debate is somewhat of a side issue. As you noted in your opening salvo, the fundamental question is about which overarching economic policies result in the most economic progress for the most people.

Taxes are one aspect. We can have a debate about the proper tax rates for specific groups. But I would prefer to make this broader point. Taxes, of course, allow for government spending. Spending that goes to programs that have major impacts on the economy and, if done properly, can truly raise all ships.  Almost every executive agency has direct impacts on the economy: Department of Education, Agriculture, Labor, Commerce, Small Business Administration, Transportation, Housing and Urban Development, Health and Human Services, Energy. Research and Development investment through DoD, NASA, and other agencies. Government spending can grow the economy. Ask Keynes about his multiplier.

Reducing tax revenue, however, necessarily means an eventual reduction in discretionary spending unless we accept increasing government deficits and debt. That is where we find ourselves today, approaching an impending fiscal cliff, as a result of bloated entitlements and insufficient revenue, which these tax cuts exacerbate. Eventually, we will be forced to increase taxes and reduce spending drastically to pay for past commitments. We need fiscal discipline in this country on both sides of the equation. Cutting taxes when the economy is strong is irresponsible. It is political myopia of the worst kind.

I think you highlight a key component of the debate on taxation when you talk about “tax fairness.” What a wonderful concept to debate. It is one that will have different answers for different people. It is a question of particulars. I think we both agree that we must provide for the basic needs of our country’s most disenfranchised while reducing the burden on our countries business and entrepreneurs—as both Keynes and Hayek agreed, I would add. I think we will continue to disagree on what constitutes fair, however.

I think it is fair to say that we do not agree on the Tax Cuts and Jobs Act. Yet you talk about national unity in your last letter. That is something that I am happy to agree with you on.

Yours in discourse,
J

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