The holidays are upon us, which means peace on Earth, goodwill toward man, and political arguments with extended family around the dinner table. This year's big topic of debate will undoubtedly be about tax cuts. To help you survive your armchair economist cousin who spent the entire drive in from Ohio listening to MSNBC and Fox News, here's a CliffsNotes guide to the debate from a professional economist/arguer.
PREPARING YOUR ARGUMENT:
What makes this and so many other economic arguments difficult, and at times heated, is that both sides are usually at least half-right. For that reason, the only 100 percent "fool-proof" correct answer to any economic question is …"it depends."
One of the best things about economics is that it is a field in which reasonable people can and often do disagree. Acknowledging that there really are two sides to every argument will go a long way toward winning over your audience and keeping your cool. Here are just some of the most important arguments for and against the Tax Cuts and Jobs Act (TCJA).
1) Tax reform will result in a better tax system. Regardless of your political persuasion, admitting that our existing tax system is pretty terrible shouldn't be difficult. In addition to having some of the highest statutory corporate tax rates in the developed world, our tax code is riddled with loopholes that make determining tax liabilities literally a full-time job.
Does the TCJA result in a perfectly efficient tax system? No. Are there certain pieces of it that actually make the tax code more complex? Yes. On the whole, however, you can reasonably make the argument that the TCJA results in a simpler and more transparent tax system than the status quo.
Closing loopholes is guaranteed to elicit negative feedback from the many people who take advantage of those loopholes, but in the end this is a good thing for our economy and tax code.
2) Tax reform will result in a faster-growing economy. The TCJA puts more money back into taxpayer pockets, which will result in a faster-growing American economy. Incomes will go up and more jobs will be created as a direct result of the TCJA. How much growth will increase, and over what time period? That is up for significant debate.
How can so many economists disagree on what seems to be so basic an argument? Two words: crowding out. Crowding out may seem like a wonky economic principle, but in reality it's very simple.
As Americans pay less money in taxes, they use that money to generate more economic activity. However, if the government has to borrow money to pay for those tax cuts, interest rates can be pushed higher. As a result, you may be paying less in taxes, but more in credit card or mortgage interest, which "crowds out" some of the economic benefits.
While this is a concept you can read about in almost any macroeconomics textbook, the exact relationship between government borrowing and higher interest rates is not entirely settled. For example, our national debt more than doubled over the last nine years, with no appreciable increase in interest rates.
The economic argument around the TCJA essentially boils down to whether or not increasing the national debt will significantly increase your credit card bill. If it does, then the economic effects will be positive, but not that significant. Think tens of thousands of jobs. However, if the experience of the last few decades holds true and interest rates increase very little, gains could be substantial. Think hundreds of thousands of jobs.
1) Tax reform only benefits the rich. This is a powerful argument because it plays to our instinctual desire for fairness. While it is 100 percent true that the TCJA will give more tax relief to higher-income Americans, it is at best disingenuous to suggest that Americans across the income spectrum won't benefit.
A recent Monmouth poll found that 50 percent of Americans believe their taxes will increase because of the TCJA, but according to the Joint Committee on Taxation, Congress' nonpartisan tax scorekeeper, almost every income level will see a net tax cut through 2025. If your fellow debaters won't believe the Joint Committee, they can look to the Tax Policy Center, which projects that at least 4 out of 5 taxpayers will pay less because of the TCJA.
Where this argument really has some legs, though, is beyond 2025. That's because, to fit within Senate budget rules, many of these tax cuts are temporary. After 2025 the benefits are projected to be concentrated heavily above $75,000 per year. The argument loses a bit of its credibility when we think about what will actually happen in 2025. History tells us, see the Bush tax cuts, for example, that these provisions will be extended before they expire, but nothing is guaranteed in Washington.
2) Passing tax reform will blow up the national debt. For my money, this is the most compelling argument against passing the TCJA. Even using the most generous economic assumptions available, passage will increase the national debt by at least $1 trillion over the next decade. It should also be noted that if the expiring provisions are extended, akin to the Bush tax cuts, that hit to the national debt would be even larger.
However, muting this argument somewhat is the fact that our national debt has already blown up. The difference between passing and not passing the TCJA is the difference between having a 90 percent debt-to-GDP ratio and a 95 percent debt-to-GDP ratio 10 years from now. We need major spending reforms if we ever want to actually get serious about addressing the national debt, as even raising taxes won't be a long-term solution to our problems.
AGREE TO DISAGREE:
There is a lot to be said both for and against the TCJA, giving you plenty to argue about this holiday season. What we're really left with is an interesting trade-off. Is it worth adding $1 trillion to the national debt in exchange for a more efficient tax code and faster economic growth?
For my part, I think that many economic models overestimate the impacts of crowding out from tax cuts, and that the economic impacts of the TCJA will be significant. Though it turns my stomach to see us add $1 trillion to the national debt, on the whole the positives outweigh the negatives and make this a bill worth passing.
However, I'm sure I'll have several family members who disagree. Merry Christmas!