Tax Cuts Versus Big Spending Is the Debate of the Decade

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When Republicans passed deep tax cuts in 2017, Democrats howled, seeing it as a giveaway to corporations and the rich that would enlarge the federal budget deficit while doing very little for economic growth. With interest rates low, they anguished over the missed opportunity to do a deficit-financed fiscal package that invested in infrastructure and workers instead, which they believed would lead to faster and more equitable growth.

But to the extent Congress ends up passing a version of the American Jobs Plan that comes close to the initial proposal, the Democrats will end up getting what they wanted after all, basically erasing much of the GOP's Tax Cuts and Jobs Act in favor of their own vision. And it will be a decade or more before it's possible to conclude which party's plan did the most for the economy, and which was most popular with the public.

One way to think about it is through the lens of basic math. The GOP's plan was expected to add about $1.5 trillion to the national debt, with roughly $1 trillion of that due to cutting the corporate tax rate to 21% from 35%. From that starting point, the Democrats' infrastructure plan is designed to be deficit-neutral, with spending paid for by restoring about $1 trillion in federal revenue by raising the corporate tax rate to 28% — about halfway back to where it was before the 2017 tax cuts. Their plan counts additional revenue by using a 15-year budget window rather than the typical 10 years, plus some other tax increases that come from different buckets than the 2017 cuts.

So essentially, compared to a pre-2017 baseline, President Joe Biden will pay for his spending plan with the revenue he'll generate by undoing Trump's tax cuts. And over time, we'll get to see how the economy evolves under the Biden plan compared to the 2017 Republican plan.

Both proponents and critics of the Republicans’ Tax Cuts and Jobs Act have valid points. The economy continued to grow without overheating in 2018 and 2019, proving that the increase in the national debt didn't spill over into problems in the bond market or measures of inflation. Wage growth was stronger in 2019 than it had been in any year since 2007. To the extent economic headwinds emerged in 2018 and 2019, it was arguably because the Federal Reserve continued to increase interest rates in 2018, which weighed on the housing market in the back half of the year. Then-President Donald Trump was also escalating his trade war, which shouldn't be held against the tax cuts plan.

Yet at the same time, real economic growth in the two years after passage of the GOP tax cut package was essentially the same as it was in the two years prior, and business investment didn't deviate from its trend, making it hard to argue where or how the legislation might have boosted the economy. For all we know, sending $1.5 trillion worth of checks to households would've led to even faster growth than what we got.

Critics of Biden's  American Jobs Plan — which include companies — will argue that raising  the corporate tax rate will cost the economy jobs and hurt the competitiveness of American businesses. But without any kind of obvious increase in investment or employment in 2018 and 2019 attributable to the GOP plan, it's hard to argue that undoing some of those tax cuts will lead to huge losses.

At the same time, because it will take years to begin, let alone complete many of the spending projects proposed by Biden, we won't have the full economic picture for the Democrats' plan until a decade or more from now — long after the economic records of Trump and Biden are relevant in the political sphere.

But that doesn't mean people won't have opinions on it in the meantime, setting up big political fights; which is why salesmanship might be more important than anything in determining which set of ideas is seen as preferable for the economy and the country.

It would be typical of Trump to argue that because of the pandemic, and because Democrats undid much of his signature legislative accomplishment, that he'll never get the credit he deserved for the impact of his tax cuts. Meanwhile Biden and the Democrats will be trying to sell the public on the economic boon of their infrastructure plans before any of the projects have even been completed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.

©2021 Bloomberg L.P.

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