TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, August 27, 2017

NY Times: Will the Republican Tax Bill Be Aimed At The Past (Good Politics) Or The Future (Good Economics)?

New York Times, Will the Republican Tax Bill Be Aimed at the Economic Past, or the Future?:

Congress and the Trump administration are said to be hard at work creating a tax bill, aiming for a signature economic policy achievement in the months ahead. As they do so, there is a fundamental tension they will have to resolve: Is this tax legislation about the past, or about the future?

The bill’s writers face a series of choices over whether to shovel more money into the pockets of individuals and businesses based on choices they have already made, or to change tax laws that shape economic incentives in the years ahead. In at least a few areas, politics favors the past while theory favors the future.

One example of this is a debate over whether a tax cut will be retroactive. Suppose that a bill passes in November or December cutting individual income tax rates. Should the lower taxes apply to income earned in 2017, or only to that earned in 2018 and beyond?

It’s easy to see why the smart thing politically would be to apply the lower rates to 2017; more money would show up in taxpayers’ refund checks in the spring of 2018, ahead of the midterm elections. When the George W. Bush administration passed tax cuts in 2001 and 2003, it took that approach.

But it also defies the economic theory about why tax cuts might be advantageous for the economy. The entire conservative philosophy behind lowering taxes is that when the government takes less, it encourages people to invest more and work harder, increasing the nation’s economic potential.

There is a continuing debate over how powerful those effects really are, yet it at least is a coherent theory of how tax cuts can generate economic growth. If a retroactive tax cut passes in November, however, no one can go back in time to January and suddenly put in more hours or invest more. ...

On the corporate side of the tax ledger, similar questions arise. Among them: whether, and how, to incentivize American companies to bring home the trillions of dollars in accumulated profits that they have kept parked overseas to avoid the 35 percent federal tax they would have to pay by repatriating the money.

There is still a great deal unknown about what type of tax legislation Congress will take up, with negotiations between House and Senate tax-writers and the Trump administration taking place behind closed doors.

But once it is revealed, the questions to ask aren’t just whether it would benefit the rich or the middle class, or what it would mean for the deficit. Another big one is whether it is more about the economic future, or the economic past.

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"There is a continuing debate over how powerful those effects really are, yet it at least is a coherent theory of how tax cuts can generate economic growth."

That's a shocking admission from the Gray Lady. Though there are no details on what "good economics" are, it's true that nobody knows where the economy is on the Laffer Curve. However, if the proposal is to keep shrinking the private sector, as higher taxes have the effect of doing, I don't see 3% GDP growth ever coming back anytime soon.

Posted by: MM | Aug 27, 2017 1:15:36 PM