Analysis of the Republican Tax Plan

by Jacob McCartney on 2018-01-09

As a libertarian, of course I applaud cutting taxes. I advocate for the abolition of the income tax, as well as several other taxes. However, as a pragmatist, I cannot look at this issue as simply as just a reduction in taxes. At face value, I love the plan. It cuts taxes for the poor, middle class, and rich, and it slices corporate taxes, which are among the highest corporate tax rates in the world.

When I delve deeper into the greater effects of the plan, however, there are problems. Without cutting spending, the decrease in revenue would add to the deficit and in turn the debt, which is already over $20 trillion. I will explain the plan further:

The Tax Cuts and Jobs Act begins by adjusting the tax brackets for ordinary income. The old and new rates are below:

Old New
10% $0-$9,525 10% $0-$9,525
15% $9,525-$38,700 12% $9,525-$38,700
25% $38,700-$93,700 22% $38,700-$82,500
28% $93,700-$195,450 24% $82,500-$157,500
33% $195,450-$424,950 32% $157,500-$200,000
35% $424,950-$426,700 35% $200,000-$500,000
39.6% $426,700+ 37% $500,000+

With the exception of the $0-$9,525 bracket, which I personally would have changed as well, everyone gets a tax cut. Ignoring all other economic factors, these cuts are a good thing, as they increase the disposable income of the average person, which increases participation in the economy and allows for greater economic growth.

The plan expands the child tax credit from $1,000 to $2,000. It appeals the individual mandate penalty from the Affordable Care Act. It increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers.

Beyond ordinary income, there is the corporate tax rate, which is lowered down to 21% from 35%. It doubles the exemption on the estate tax exemption from $5.6 million to $11.2 million.

The Tax Foundation shows the following chart as a result of the plan:

Change in long-run GDP 1.7%
Change in long-run capital stock 4.8%
Change in long-run wage rate 1.5%
Change in long-run full-time equivalent jobs 339,000

As you can see, at first glance, the tax plan looks fantastic. It lowers the burden for most of the population, giving them more money to either spend or save, both of which are good for the economy to varying degrees. Still, though, there is the bigger picture.

I find myself convinced that, in the drafting of this plan, the Laffer Curve was mentioned. The Laffer Curve dates back to 1974, where Arthur Laffer was speaking to President Gerald Ford's staff about the effect of taxes on the population's trust in the economy. Drawing an impromptu graph on a napkin, he tried to explain that the burden taxes impairs production, impacting government revenue. What he drew likely resembles the following:

laffer-curve.jpg

While Laffer was explaining the opposite of what is happening in the tax plan, the same principle applies. In theory, even while tax rates go down, the economic growth resulting from it will actually raise tax revenue. This is the theory, but the actual numbers resulting from the plan may tell a different story.

According to the Tax Foundation, "the proposal would reduce federal revenue by $1.47 trillion over the next decade." Factoring in economic growth from the increased discretionary income, tax revenue will grow by $600 billion. This still leaves $494 billion in tax revenue lost. Federal spending was greater than federal revenue before this plan passed, and the government shows no signs of lowering spending anytime soon.

The Tax Policy Center reports that this reduction in revenue without an accompanying reduction in spending "is projected to increase debt as a share of GDP over 5 percentage points in 2027 to 97 percent of GDP, and almost 4 percentage points in 2037 to 117 percent of GDP."

117% of GDP is an absurd number. The national debt is a crisis that needs to be dealt with. The unfortunate truth, though, is that those in power have no interest in solving this problem, and it likely will not receive enough attention until it is an immediate problem.

My biggest criticism of Keynesian economics is that is sacrifices long-term economic stability for short-term stability. This plan is essentially that. It will grow the economy in the short-run, but in the long-run, the debt will continue to increase at an even faster rate.

That is the sad reality of the plan that has so much potential. I am therefore forced to oppose it, only because of its adverse effects in the long-run. If the Republicans can manage to end deficit spending too, I will change my stance.


Sources

https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ https://www.investopedia.com/terms/l/laffercurve.asp http://www.taxpolicycenter.org/feature/analysis-tax-cuts-and-jobs-act