Voodoo economics fails again.
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| A sign advertises for a sale in midtown Manhattan in February 2019 in New York City. Numbers released at that time showed that the G.D.P. only grew at a 2.6 percent annual rate in the final three months of the previous year.Spencer Platt/Getty Images |
In late 2007 the Trump administration pushed through a large tax cut, whose key component was a drastic reduction in the tax rate on corporate profits. Although most economists were skeptical about claims that this would do wonders for economic growth, conservatives were ebullient. Lower tax rates, they claimed, would give American corporations the incentive to bring back trillions of dollars invested overseas, and foreign corporations a reason to invest huge sums in the U.S. |
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And Republican politicians bought this argument. Even Susan Collins, the most moderate Republican in the Senate (although that isn't saying much) declared herself convinced that the tax cuts would pay for themselves. |
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To their credit, I guess, the tax-cutters put numbers to these claims. The right-wing Tax Policy Foundation predicted that G.D.P. would be 2.9 percent higher by 2027; the White House was even more optimistic, claiming that the gain would be between 3 and 5 percent. |
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To yield results like this, the tax cut would have to produce a huge surge in business investment. The arithmetic runs roughly like this: To raise real G.D.P. by 4 percent over a decade, you'd have to raise the annual growth rate by 0.4 percent. We think business investment has a real rate of return of maybe 10 percent or less. So business investment as a share of G.D.P. would have to go up by around 4 percentage points. |
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Well, we're into the second half of 2019, time enough for businesses to have responded fully to the new incentives. Here's what has happened: |
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| Business investment as % of GDPFederal Reserve of St. Louis |
Business investment was 13.2 percent of G.D.P. before the tax cut went into effect. It's now … 13.5 percent. That's a rise of around 0.3 percentage points, or less than a tenth of what the tax-cut advocates predicted. |
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I think this counts as a belly flop. At this rate, whatever extra growth we might get will be more than offset by the big tax breaks Trump gave foreign investors. This tax cut made America as a whole poorer, even as it made a few wealthy Americans richer. |
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Actually, the belly flop is so bad that even center-left economists are puzzled. After all, cutting tax rates should give companies at least some incentive to invest. Why aren't they responding at all? |
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One answer might be monopoly power: give a monopolist a tax break, and it just sits on the money. Another answer might be that the uncertainty created by Trump's trade wars has, um, trumped any incentive effects. |
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In any case, the Tax Cuts and Jobs Act of 2017 now joins the voodoo hall of fame alongside such luminaries as the Bush tax cuts of 2001-2 and the Kansas tax cuts of 2012: highly touted policies that were supposed to produce economic miracles but instead did nothing but explode budget deficits. |
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So will Republicans finally learn to stop believing, or pretending to believe, in tax-cut hype? No, of course not. Faith in tax cuts is the ultimate unkillable zombie. |
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Trump was considering a beggar-thy-neighbor currency intervention. This would represent total abdication of American leadership. |
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| Can we nominate Chrisjen Avasarala?YouTube |
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