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President Trump’s Tax Plan: Why Rational Republicans Should Bail

Fri ,10/11/2017

President Trump’s new tax plan looks a lot like Governor Brownback’s tax plan for Kansas, which had been disastrous for the state’s economy. Rational Republicans should realize that if an experiment fails, and fails miserably, there is no point in repeating it. That is particularly true when the economy of the entire country is at stake. Both the economic theory and Governor Brownback’s experiment with the Kansas economy show that Trump’s tax plan is doomed to fail. The tax bills now winding their way through Congress will lead to economic stagnation and an increased  in the national debt of $1.5 trillion, both things which are repugnant to rational Republicans.

The Theory is based on Laffer’s curve which is displayed at the right. 

The Laffer curve looks like a normal distribution curve. In theory, if the nation is on the high side of the curve with taxes around 80%, then the curve predicts that cutting taxes will cause a move to the left along the curve, increasing tax revenue. That is likely to improve economic growth.  If the nation is on the low side of the curve with taxes around 40%, then cutting taxes will also lead to the left along the curve,  decreasing tax revenue, leading to a stagnating economy, and certainly a greater public debt.

The United States is now on the low side  of the curve with the high marginal tax rate around 40% – so cutting taxes will not lead to increased revenue or spur economic growth. Laffer should know that, but he has abandoned reason and professional ethics and now just supports tax cuts without reference to his own curve. Kansas paid Laffer $75,000 in consultation fees. His advice, when the Kansas economy was tanking, the public debt was mounting, and job growth was decreasing – was to stay the course. Kansas Republicans finally realized that the experiment had failed. They increased the tax rate, and overrode Governor Brownback’s veto of the tax increase. The governor is now leaving the state before his term is up.

The failure in practice is described by Duane Goossen, who was the Kansas budget director for 12 years prior to Brownback’s experiment:

  • “Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. Most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the “LLC loophole”, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.
  • Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that his administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.”

At the right is a graph showing job growth in Kansas during Brownback’s years. It is lower than the United States job growth and much lower than in California, which has a high tax rate.

  •  Mr. Goossen goes on, “But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefiting — well, it turns out that the bulk of the benefits went to the wealthiest Kansans while the tax bill to low-income Kansans went up.
  • The idea that tax cuts will ‘pay for themselves’ or that tax cuts for the wealthy will ‘trickle down’ to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job was seductive, but Kansans have the raw experience to grasp that the experiment carried out on us was a failure.
  • Do you know how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?”

There you have it.

The Eisenhower Memorial is now being built and the Kansas politicians are using it as a chance to praise Eisenhower.  Eisenhower was a great General and President because he realized that it required requisite resources to get the job done. Under Eisenhower, the top tax rate was 90%. Eisenhower used the money to pay our war debts, rebuild Europe, educate returning GIs, and build the national highway system which ensured economic growth for decades to come. We no longer need a 90% tax rate, but our tax rate is now too low, and cutting it further will deprive the country of the resources it needs.

The the current Republican tax plan is taking shape. The big winners will be corporations and those already wealthy. Though billed as a tax cut for the middle class, the biggest losers will be the middle-class taxpayers and United States economy. Under the proposed plan we will see:

  • “Up to half-a-trillion dollars cut from Medicare and Medicaid
  • Substantial increase in the national debt with no way to pay it off
  • Elimination of state and local tax deductions – designed to hit people who live in “blue” states the hardest
  • Repeal of an itemized deduction for medical expenses – hitting people who rack up large medical bills because of the inadequacies of our health insurance system
  • Repeal of the deduction for interest on student loans
  • Repeal of the deduction for teachers purchasing classroom supplies
  • Slashed incentives for wind energy and electric vehicles, while maintaining most of the permanent oil incentives and extending nuclear energy tax breaks”

Our current Republican tax plan will add over a trillion dollars to the national debt and will not provide the resources needed to take care of the needs of our country and build for the future.. The tax rate we now have is already too low as the national debt is increasing. Cutting taxes further will surely lead to economic stagnation and an increased national debt, both things which are repugnant to Republicans.

(c) 2017 J.C. Moore