TaxProf Blog

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

Tuesday, March 19, 2019

Gale & Listokin: The 2017 Tax Cuts Will Make It Harder To Fight Future Recessions

The Hill op-ed:  The Tax Cuts Will Make Fighting Future Recessions Complicated, by William Gale (Brookings Institution) & Yair Listokin (Yale):

Ten years after hitting rock bottom, the economy is still going strong. But it is never too soon to think about responding to the next recession. The Federal Reserve may be unable to cut interest rates very much in a future downturn because even today rates are within striking range of the zero lower bound. Unfortunately, another key part of the fiscal policy portfolio, which is the automatic response of taxes, will be compromised. Indeed, the 2017 tax cuts will make it more difficult to fight off a future downturn.

The tax system generally works as one way to help stabilize the economy. Taxes naturally rise and fall with income, buffering the effects of economic fluctuations on what workers and firms spend. Moreover, revenues from individual income taxes and corporate income taxes tend to rise or fall by even more than income itself, further moderating booms and cushioning recessions. All of this happens automatically without needing legislation. ...

[T]he 2017 tax cuts made several changes that significantly reduce the ability to offset the business cycle.

First, the corporate income tax rate was reduced from 35 percent to 21 percent. Corporate income tends to soar in booms and plummet in recessions, so lower rates mean that revenues will not adjust as much to our highs and lows in the economy. The tax cuts also reduced rates for income from wages and pass through businesses. As a result, when income falls in a future recession, taxes will fall by less than they otherwise would have.

Next, the tax cuts limits the use of net operating losses. ... The tax cuts also allowed full first year tax write offs for many investments. ... Finally, under prior law, businesses could deduct all interest payments to creditors. ...

When the economy eventually turns down, the tax cuts will exacerbate the problem. Policymakers can offset this impact by making stronger discretionary fiscal choices when a recession arrives or by installing stronger automatic stabilizers today.

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I see where you went wrong. The Brahmin ruler-elites don't want to stop another recession. They like creating these "buying opportunities" by forcing those folks who are marginally secure in their investments and property into distress, and buying up those assets at depressed prices. That's the whole purpose of these manufactured market and housing bubbles. The bubble is the bait for the trap. The bursting of the bubble is the springing of the trap. The resulting recession is where the cash rich and powerful swoop in to scoop up the fire-sale assets.

Posted by: ruralcounsel | Mar 20, 2019 4:57:26 AM