Will Corporate Tax Cuts Really Reduce the U.S. Budget Deficit?

Mick Mulvaney
Mick Mulvaney (Wikipedia)

President Donald Trump and the Republican-led Congress are trying to pass federal tax reform legislation that could increase the U.S. government’s burgeoning debt by trillions of dollars. The federal government already owes more than $20 trillion, which is about $1 trillion more than the current annual U.S. gross domestic product (GDP). And the $666 billion budget deficit for the federal fiscal year that concluded in October was the sixth highest on record.

Most economists say the best way to reduce the budget deficit without hurting the economy is by gradually implementing a combination of carefully crafted spending cuts and tax increases. But Trump’s Director of the Office of Management and Budget (OMB), former Congressman Mick Mulvaney, says there’s no political will in Congress to make spending cuts, so the only way to reduce the deficit is to increase tax revenue by stimulating annual economic growth to at least 3% through tax cuts.

A reduction in corporate taxes is at the core of the Republican tax reform strategy. They claim that the U.S. economy is at an international competitive disadvantage because the 35% federal corporate tax rate that’s been in effect since 1933 is among the highest in the world. They say that lowering it would increase economic growth because corporations would repatriate some earnings from foreign countries and conduct more business in the U.S.

But there is little evidence that the proposed tax cuts will generate enough compensatory growth to pay for themselves. For example, if 25% of U.S. income goes to towards taxes, every $1 of tax cuts would have to generate more than $5 of increased economic activity. And history shows that previous Republican tax cuts failed to produce promised increases in tax revenue. During the Reagan administration in the 1980s the Republicans gave tax cuts to the wealthy that were supposed to generate growth and income that would “trickle down” to the middle and lower classes. Instead, their supply-side strategy significantly increased the national debt, shrank the middle class, increased unemployment, and accelerated income inequality. In other words, the wealthy people just kept most of the money. More recently, Arizona’s Republican Gov. Doug Ducey pushed state corporate tax cuts that have resulted in a $24 million shortfall in the state’s FY2018 budget which will likely grow to $80 million for FY2019, according to the state’s Joint Legislative Budget Committee.

Furthermore, while the statutory U.S. corporate tax rate is high, corporations can take expense deductions that make their effective tax rates lower. According to a 2017 Congressional Budget Office report, the U.S. effective corporate tax rate was only 18.6% in 2012. Also, corporations consider many factors when they make business decisions. A tax rate would be the deciding factor only if all other things were equal. And few corporations are willing to pass up the profitable privilege of doing business in the U.S., the world’s largest economy.

Some corporations, of course, would use the money they’d save from a reduction in corporate tax rates to invest in new production. But many would simply inflate their stock values by buying back stock, increasing dividend payments to their stockholders, or  they would pay of their executive officers to even more outrageous amounts. These things would contribute little to economic growth, as most stock dividends don’t go to middle or lower income class consumers, and wealthier CEOs would just accelerate growing income inequality.

The primary lesson from the failure of supply-side economics is that not all tax cuts are the same, and that real economic stimulus comes from reducing taxes for the U.S. economy’s primary consumers – the lower and middle income classes. Subsequently, supporters of the Republican tax reform effort, including President Trump, are selling it as a tax cut for the middle class. But the middle class tax cuts included among the various features in their reform proposals are very modest, and in the Senate’s version of the bill they would expire at the end of 2025.

The reason they are set expire is because Senate Republicans passed a budget resolution in October to protect their tax reform bill from a Democratic filibuster. As long as the bill doesn’t add more than $1.5 trillion to the deficit over the next ten years, Republicans will only need 51 votes to pass it in the Senate. In other words, they know that their proposed tax cuts will significantly increase the national debt, and they’d rather eliminate tax cuts to the middle class than corporate tax cuts to avoid exceeding their self-imposed arbitrary limit on the inevitable debt increase.

Another indicator that they don’t really believe their proposed tax cuts will pay for themselves is that Republican Sen. Bob Corker (R-Tenn.) has insisted that the final version of the bill contain a “trigger” that forces reconsideration of the tax cuts if it appears they are creating a big increase in the federal budget deficit.

The truth is that the Republican fixation on implementing tax cuts is a long-held political objective, not a proven economic tool. This if further revealed by House’s version of the bill which includes a provision to eliminate the estate tax, which would cost more than $172 billion in lost tax revenue over the next 10 years in order to benefit a relative handful of ultra rich families.

The proven Keynesian strategies of creating economic stimulus by lowering interest rates and increasing government spending aren’t available because they’re already exhausted. Interest rates have been at historically low levels for years in response to the Great Recession, and the federal debt has already reached historical highs.  So, instead of doing the hard work of compromising with Democrats to make sound budget deals, Republicans are trying to sell this tax reform bill as a magical panacea. They know that if it doesn’t work, their wealthy dark money campaign donors will still be happy with their lower taxes. Also, it will make it easier for them to cut funding for popular programs they don’t like, such as Social Security and Medicare.

In the meantime, the U.S. economy is doing quite well, and an argument can be made that there’s no immediate need for any tax cuts. The minimum economic growth rate that the Trump administration claims is necessary to shrink the budget deficit has already been achieved. The economy grew by 3.1% in the second quarter, and by 3% in the third quarter of this year. At the same time, unemployment was down to 4.1% in October, the lowest its been in more than 10 years. There are still some stubborn pockets of unemployment, but they are mostly the result of technological advances that have rendered some jobs obsolete, and the laid off workers don’t have the necessary skills to succeed in the new economy. And, by the way, recent corporate profits are at all-time historical highs.

The bottom line is that the Republican tax reform proposals look an awful lot like the failed supply-side “voodoo economics” of the Reagan administration. If Republicans really want to improve the economy, they should find a way to focus tax cuts on the middle and lower income classes, while investing in education, healthcare, public transportation, and affordable daycare. This strategy could increase the federal budge deficit too, if it isn’t accompanied by fair spending cuts combined with the elimination of tax loopholes and unnecessary subsidies. But it would have a much better chance of success. It would help Americans work themselves up from the bottom, instead of giving them false hope that some crumbs might trickle down from above.

Updates

On November 30, 2017, the Senate’s parliamentarian declared that the inclusion of the “trigger” provision demanded by Republican Sen. Bob Corker (R-Tenn.) would violate the special budget resolution rules the Republicans want to use to pass the tax bill without any Democratic support.

Late in the evening of December 1, 2017, Senate Republicans finally succeeded in passing their version of a tax reform bill. A conference committee must reconcile it with the version that was previously passed by the House before a final version can be sent to President Trump for his signature.

On December 22, 2017, President Donald Trump signed the $1.5 trillion tax cut bill, named the Tax Cuts and Jobs Act of 2017. It became effective January 1, 2018.

In July, 2018, the U.S. Treasury Department reported that the federal government recorded a $74.9 billion deficit in June, a month when the government often runs a surplus, as corporate taxes dropped sharply compared to a year ago. The government had a budget surplus in June in 52 of the past 64 years.

On September 13, 2018, the U.S. Treasury Department  announced the U.S. budget deficit had widened to $898 billion in the 11 months of the current federal fiscal year, which concludes at the end of September, and revenue from corporate taxes had fallen by $71 billion from a year ago.

The Ineptitude of the Republicans is Costing Us Money

President Donald Trump, Senate Majority Leader Mitch McConnell, Speaker of the House Paul Ryan
President Donald Trump, Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan (Wikipedia)

Despite the fact that Republicans control the presidency and Congress, they have failed to raise the federal government’s debt ceiling, and it’s costing U.S. taxpayers a lot of money.

Congress authorized the accumulation of federal debt on a case-by-case basis until the 1917, when the U.S. entered World War I. That year it decided to establish an overall federal debt ceiling to provide more financial flexibility in order to finance the war effort. Since then, Congress has continued the strategy of authorizing debt ceilings.

In recent years, however, the authorization of debt ceiling increases has become a politically contentious process, despite the fact they are needed to pay for expenditures that have already been made. So Congress has resorted to temporarily suspending the debt ceiling. During these suspensions, the U.S. Treasury is authorized to borrow enough to pay all of the government’s existing commitments, irregardless of the most recently authorized debt ceiling. But when the suspension expires, the debt ceiling reverts to what it was before the suspension. The most recent suspension was passed in November 2015 and expired in March 2017, which reinstated the 2015 debt ceiling.

Subsequently, the Treasury has been unable to borrow enough money to meet its obligations since then, because the federal government has a budget deficit. They have been limping along using some accounting tricks. But it’s estimated that these emergency measures will be exhausted by the beginning of October.

This means that, unless the debt ceiling is increased before then, the federal government will be in default on its bond interest payments, which will hurt the nation’s credit rating. It will also be unable to pay other bills and there will be at least a partial government shutdown. Furthermore, the federal government’s 2018 fiscal year begins on October 1, and Congress still needs to approve annual appropriations bills. If these budget issues aren’t soon dealt with, there will be some very big problems.

But even if they get these things done in time, the Republicans have already cost us a lot of money. That’s because the “extraordinary measures” the Treasury has been forced to use to fund the government since March are more expensive than issuing government bonds, the method the Treasury normally uses to raise the money it needs to pay the bills that exceed the revenue collected from taxes. (Paying interest on bonds is relatively inexpensive these days because the Federal Reserve has been holding down interest rates in order to stimulate the economy.)

On July 26 Republican Senator James Lankford of Oklahoma said during a Senate hearing that the Treasury’s extraordinary measures in 2017 had already cost taxpayers $2.5 billion. Trump’s Treasury Secretary Steven Mnuchin did not dispute the amount and agreed the situation was creating extra costs. It’s undoubtedly cost us much more than that by now.

The reluctance of Congress to raise the debt ceiling is driven by the growing concern about the increasing federal debt, which began a dramatic increase during the Reagan administration. Economists say that the reduction of federal budget deficits must be accomplished with a combination of spending cuts and tax increases in order to avoid harming the economy. But these types of political agreements are difficult, and far-right congressional Republicans have made them more so in recent years by using the authorization of debt ceiling increases as a weapon to engage in political brinkmanship, such as the government shutdown they instigated in 2013. They seem oblivious to the fact that their behavior is making the thing they’re worried about worse.

history of federal debt
Federal debt held by the public as a percentage of gross domestic product, from 1790 to 2013, projected to 2038. (Wikipedia)

Solving these important federal budget issues is also complicated by the fact that President Donald Trump has exhibited an alarmingly limited understanding of how the U.S. government works. He’s publicly criticized the Congressional Republicans he needs to work with, including Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan. And he’s threatened to shut down the federal government if Congress doesn’t authorize funds to build the wall he wants to erect along the Mexican border. In addition, there’s the need to pass legislation as soon as possible to aid the victims of Hurricane Harvey. Furthermore, Trump’s decision to end the Consideration of Deferred Action for Childhood Arrivals (DACA) program in six months has added major immigration reform to Congress’s agenda.

In the meantime, Congress seems to be making little headway on Trump’s tax reform and infrastructure spending proposals – two of his major campaign promises. And, of course, there are the constant distractions created by his controversial behavior, along with the ongoing investigations into his presidential campaign’s collusion with Russia during the 2016 election. The whole situation is pretty much a scary clown show.

The Medicare Part D Scandal

george w. bush
George W. Bush (Wikipedia)

One of the worst things the George W. Bush administration inflicted upon the American people, second only to the debacle in Iraq, was the sweetheart deal for drug companies that was included in the 2003 Medicare Prescription Drug, Improvement, and Modernization Act (also called the Medicare Modernization Act or MMA). The primary feature of the MMA was the creation of a prescription drug benefit for Medicare beneficiaries, now called Medicare Part D. While prescription drug coverage, of course, is vital to many senior citizens, the way the Part D program was implemented is disgraceful.

Speaker Dennis Hastert introduced the MMA, with Bush’s support, in the Republican controlled U.S. House of Representatives in June of 2003. While Congress was debating the bill, Thomas Scully, the Bush administration’s head of the Centers for Medicare and Medicaid Services (CMS), lied to Congress about the projected cost of implementing the Part D benefit. Scully also threatened to fire Medicare’s chief actuary, Richard Foster, if he revealed that the true estimated cost of the Part D program was $500-$600 billion over 10 years, instead of the $400 billion that the White House was telling Congress. (A subsequent report by the Congressional Research Service found that the Bush administration broke federal law by withholding this information from Congress.)

A Sweetheart Deal for the Drug Companies

Congress finally approved the MMA in November after some close and suspicious votes. The drug industry lobby, the biggest lobby in Washington, D.C., undoubtedly paid a major role in its passage. The new law, for example, didn’t include any significant cost-control provisions. In fact, it specifically prohibited Medicare from establishing a drug formulary or from negotiating prices with drug companies. Also, after the bill’s passage, former Congressman Billy Tauzin, R-LA, who steered the bill through the House, retired and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main drug industry lobbying group. Furthermore, Thomas Scully was found to have been looking for a new job as a pharmaceutical lobbyist while the bill was still working its way through Congress. And a total of 14 congressional aides went to work for the drug and medical lobbies after the bill’s passage. Subsequently, according to a 2013 CMS report, the Medicare Part D program added about $318 billion to the national debt through 2012, and is projected to add $852 billion over the next 10 years.

The social service agencies of most foreign governments negotiate for volume discounts with drug companies. The U.S. Department of Veterans Affairs is allowed to do it, and it’s been estimated that the VA pays between 40% and 58% less for drugs, on average, than Medicare Part D. Economist Dean Baker estimated in 2012 that Medicare could have saved taxpayers at least $332 billion and possibly as much as $563 billion if the agency wasn’t required by the MMA rules to pay whatever prices the drug companies want.

Allowing Medicare to negotiate drug prices would obviously be fair way to significantly cut government spending and reduce the federal budget deficit. But that would reduce the profits of drug companies, and most Republicans believe drug company profits are more important.

Updates

On May 11, 2018, President Donald Trump announced his plan to lower drug prices for Americans. During the 2016 presidential election campaign Trump had promised to allow Medicare to negotiate discount prices for the drugs it buys. But Trump’s proposal failed to include that measure. The stock prices of drug companies rose after his speech.

On May 17, 2018, the FDA released a list of 52 drugs it said faced delays in getting generic versions on the market because of “gaming” by drugmakers.

On June 5, 2018, the U.S. government’s annual report on Medicare and Social Security said that, unless some changes are made, Medicare will become insolvent in 2026.

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