President Donald Trump is trying to sell his tax reform plan to his base and the rest of the Republicans – both the new blood and establishment dinosaurs. Trump, Treasury Secretary Steven Mnuchin, and top economic advisor Gary Cohn have had their difficulties, but now some of the most prominent donors are suggesting that the GOP should ignore the deficit that would result from the president’s tax reform initiative.
For the last eight years, Republicans slammed President Barack Obama and the Democrats for annual budget deficits, arguing that they would add more to the national debt and prompt future generations to pay for today’s mess. So, ignoring it this time would not only be foolish, it would be hypocritical.
Let’s be honest: genuine tax reform is impossible, and the current proposal will not achieve much other than giving us another chuckle at the Laffer Curve.
The Kibitzing Koch Brothers
During the Obama years, Charles and David Koch – the famous billionaire brothers – talked about the deficits with great acerbity. And rightly so. But it seems the duo are beginning to tergiversate.
Last week, The Intercept got its hands on a memo from the Koch brothers’ network on how to sell tax reform legislation to the American people. Their idea? Ignore the deficit:
“In case it is helpful to you in your own discussions with lawmakers and others, below is a list of talking points that address some of the key hurdles to passing tax reform this year.
“Avoid getting distracted on revenue neutrality; economic growth increases revenues. Some Republican Senators have expressed concern over supporting comprehensive tax reform that adds to short-term deficits. Though we fully appreciate those concerns, the long-term economic growth that would result from the first comprehensive tax reform in a generation would help to offset short-term deficits over time. That was the result of the Kennedy and Reagan tax reforms—there’s no reason this time will be any different.”
It is estimated that President Trump’s tax reform will generate as much as $2 trillion in deficits over the next 10 years. The Trump administration has dismissed these forecasts, noting that economic growth will generate more revenues. But we have seen this song and dance routine before.
Thankfully, there are many Republicans who are apprehensive about deficits, including Senator Rand Paul (R-KY) and Representative Justin Amash (R-MI). As we have seen from the establishment, swamp-living RINOs, they talk tough when they’re the opposition, but the efficacy of their actions is often disappointing.
We can only hope that Senator Paul can go one a one-man crusade preventing rising debt and deficits for the next four years.
A Brief History of Deficits
In the late 1990s, President Bill Clinton and the Republican-controlled Congress were successful in balancing the books – raiding Social Security and benefiting from the dot-boom helped. When President George W. Bush took over 1600 Pennsylvania Avenue, the U.S. returned to bleeding red ink.
Prior to the invasion of Iraq, the U.S. government posted a $300 billion budget deficit. By the time W. left office, the deficit topped $1.4 trillion. Did it matter? Vice President Dick Cheney famously averred that “deficits don’t matter.”
When President Barack Obama received the keys to the Oval Office, the deficits started to decrease. Was it because of the president’s policies? Hardly. The Federal Reserve’s money-printing seeped into the economy, and the boom commenced, leading Washington to further kick the can down the road and refrain from making significant spending cuts.
A decade after the Great Recession, Democrats and Republicans alike still refuse to make tough choices. Because they fear losing their seats in the House and Senate, the elephants and donkeys want to play the role of Santa Claus. Their all-year-long holiday spirit will help the budget return to the trillion-dollar-mark by 2020, according to the Congressional Budget Office (CBO).
There have been a few politicians who have wanted to take the budget seriously, including three-time presidential candidate Ron Paul, two-time presidential candidate Ross Perot and Senator Rand Paul. Unfortunately, most of the esteemed representatives on both sides of the aisle seem to be a bunch of cunctators.
Just take a gander at this 30-minute Perot campaign video from 1992:
The left may deem that President Trump is literally Hitler for some of his moves, such as cutting or eliminating the Overseas Private Investment Corporation or the National Endowment for the Arts. But the budget doesn’t launch a full-frontal assault on the meat and potatoes: the welfare-welfare state.
Where is President Trump’s ax?
Dr. Paul wrote this past summer that Trump’s budget “is just more of the same”:
“In fact, this so-called ‘radical’ budget does not even cut domestic spending! Instead, it plays the old DC game of reducing ‘the projected rate of growth.’ For example, under Trump’s budget, Medicaid spending increases from $378 billion this year to $525 billion in 2027. Only in the bizarro world of Washington, DC can a 38 percent increase be considered a cut.
President Trump’s budget combines phony cuts in domestic spending with real increases in military spending. Specifically, the budget increases the military budget by $23 billion over the next ten years. Trump claims that the increase is necessary to reverse the damage done to our military by sequestration. But, despite the claims of the military-industrial complex and its defenders in Congress, on K Street, and in the media, military spending has increased over the past several years, especially when the ‘off-budget’ Overseas Contingency Operations funding is added to the ‘official’ budget.”
Laughing at the Laffer Curve
Cue the laugh track.
In 1974, the Laffer Curve entered the American lexicon. It is an economic theory developed by economist Arthur Laffer, which essentially states that tax cuts will pay for themselves – he doesn’t take full responsibility for the concept, however, because there have been elements of it in the past.
The Laffer Curve, which was written on a cocktail napkin as he was drinking wine, became an essential aspect of Reaganomics in the 1980s. President Ronald Reagan helped expand the U.S. economy to impressive heights with supply-side economics, but it didn’t help the nation’s fiscal mess.
Tax revenues were about 18% of the gross domestic product (GDP), but federal spending was just under 23% of the GDP. As a result, in five of Reagan’s eight years in office, the budget deficit increased, reaching a peak of $221 billion in 1986. The national debt also rose from $997 billion to nearly $3 trillion.
When a president cuts taxes, leftists will ask: how are you going to pay for them? That’s the wrong question because it implies that the government owns all the wealth in the country. When a president cuts taxes, the real question should be: how many spending cuts are you going to make?
Remember the otiose sequester in 2012? The Republicans thought they were reining in spending, while the Democrats thought the world was coming to an end. Neither happened; it was just the status quo – only in Washington can supposed spending cuts boost the national debt.
Tax Reform is a Myth
Mention tax reform to any conservative or libertarian economist and they will giggle like Brian Williams when bombs drop on foreign land.
President Trump and his administration have not released the full details of the tax proposal. The preliminary particulars show that some people are getting a tax cut, others are getting a tax increase, and corporate taxes will be on par with Scandinavian states.
Indeed, the public may get a completely different plan in the end – for instance, the president has remarked that he may consider raising taxes on the rich.
Overall, tax reform is one of three things: a myth, a con, or impossible. It depends on your point of view.
Jeff Deist of the Mises Institute summed it up perfectly last month:
“It’s a con, and a shell game. It’s a promise every presidential candidate makes, including Trump. But we ought to be suspicious of grandiose talk about Congress reforming anything. Tax reform proposals always evade and obscure the real issue, which is the total cost– financial, compliance, and human– taxes impose on society. The fundamental questions about war and entitlements and state power go unasked. We never consider whether Congress really needs to spend more than $4 trillion in 2018, or how it managed to double federal spending in only 15 years.”
From what we have seen so far, coupling tax cuts with spending increases can only lead to economic harm posed by growth in the national debt. This type of Faustian economics will inevitably wreak havoc on future generations in the forms of more taxes, more currency devaluation, and more government.
Mephistopheles would be proud.
Fortunately, Senator Paul is reportedly in the ear of President Trump, and this could be a good thing for liberty, fiscal management, and a reduction in the welfare-warfare state – it also irks the left, but that’s just the cherry on top. If there is anyone who can help the president return to the path of liberty, it is the son of the Champion of the Constitution.
Real tax reform is cutting spending, scrapping the tax code, and shrinking the size of the state. That will really drain the swamp.
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