Looks like tax cut legislation is just about a done deal. And sometimes a bad deal is better than no deal.
Now that both the House of Representatives and the Senate have passed tax legislation bills, the only remaining step is sorting out the differences between the two and agreeing on a final bill to send to the President. There is a high probability that tax legislation becomes law by year-end—if for no other reason than Republicans need something positive to show for in the upcoming mid-term elections.
From a purely macroeconomic perspective (not an individual taxpayer or business-owner perspective), we find three problems with the current bills.
- The first is technical. This is not true, long-term tax reform like Reagan bipartisanly and masterfully executed in the early 1980s. This is a tax cut that will expire in 2025 and will then reset to current law. The difference in economic impact between the two is huge. The former would incentivize U.S. business owners and decision makers to invest for the long-term knowing that the tax regime will remain the same for a much longer period. The latter ensures, of course, more money into corporate coffers that may not find its way into the economy but rather the pockets of shareholders.
- The second problem is philosophical. No doubt this is a tax cut that should have a positive impact across all social classes. There were many reports in recent weeks that the bill would raise taxes for the average American, but analysis by the Urban Bookings Tax Policy Center, a clear-minded think tank, shows that’s not the case:
However, because of the technical problem mentioned above, the tax bill will almost certainly increase inequality and likely won’t boost growth as much as some claim.
- Finally, we have a timing problem. It doesn’t make sense to lower taxes at the height of a business cycle expansion (ahem, right now). And it definitely doesn’t make sense to do it when the Federal Reserve Bank is looking for any excuse to further increase short-term interest rates and tighten financial conditions. You cut taxes when the economy is in recession and needs the stimulus.
Contact Russell Moenich to learn more about this topic.
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