Tax reform has been one of the few legislative accomplishments of the Trump administration thus far. Slashing taxes for businesses as well as individuals, the new tax regime looks great where the pocket book is concerned. But because it failed to address either the byzantine complexities of the tax code, or the problem of vast government overspending, the reforms may end up causing more harm than good.
Financial markets have been pleased; an unsurprising event since anything that improves corporate bottom-lines across the board is sure to receive a warm welcome from the investment world.
The current tax reform’s chief contributions are just such a slashing of tax rates, as well as a special tax holiday for the trillions of dollars currently sitting abroad. The Trump bull market, which was energetic throughout 2017, was fueled in good part by anticipation of this sort of reform. While partially baked in, the shift from the page to actual concrete law is bound to further enliven capital markets, especially as companies report share buybacks and improved bottom-lines in their first quarter earnings reports in a few months’ time.
The problem is that the tax reform, while doing some good in terms of boosting middle income Americans’ earnings, does little to tackle the serious economic pathologies that threaten to upend the economy.
Spending on entitlements continues to expand at staggering rates and the tax cuts have not been funded by commensurate cuts in spending.
Some might argue that the cuts will boost economic growth to the point where the cuts will fund themselves, but that seems rather far-fetched. There will certainly be a boost to economic growth, but it is virtually impossible that it will be enough to cover the shortfall in government revenues.
That is especially true when we consider that the economy is already growing at a solid pace, with labor markets tightening and capital markets at all-time highs across virtually all asset classes. The tax reform may have the perverse effect of overheating capital markets, and potentially increasing already worrying behavior from investment managers.
We can already see the shift of investment into riskier assets as managers seek higher yields in the face of rising prices. That is extremely dangerous from a long-term view, since the greater allocation to such risky assets risks destroying savings and creating another financial crisis.
The real economy, too, may be harmed by the tax reforms.
Yes, small businesses will benefit from a number of the provisions of the new law, but from a macroeconomic standpoint there is a lot to fear. Again, the specter of unfunded tax cuts rears its ugly head, with huge government spending still on the cards. That means more borrowing and higher deficits.
This should matter to anyone with a libertarian sensibility for both economic and political reasons.
Economically, we know that massive debt is unsustainable and will eventually cause strain – and even permanent damage – to the economic future of the country.
Politically, we must also recognize that tax cuts, while in keeping with our ideology, cannot be achieved without commensurate cuts in spending.
When policies cut taxes but not spending, it creates a political case that the left can exploit. Because it looks like financial profligacy, it gives them the cover to win elections and raise taxes. And those taxes will probably be higher to cover the unfunded gaps.
The Trump tax reforms threaten to make a caricature of low-tax, free-market policies that the left can exploit and use to discredit sound economic policy. Politicians find it far easier to cut taxes than to curb spending. As libertarians, we must endeavor to put distance between ourselves and Republicans’ terrible economics as much as we do Democrats’ terrible economics.
John Engle
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