"Big, bearuful bill' in trouble

Gordon L. Weil

It’s all about the Laffer Curve.

President Trump’s “One, big, beautiful bill” to cut taxes and spending has run right into it.

The Laffer Curve, an idea promoted by economist Arthur Laffer, has been around since Ronald Reagan was president.

It’s about the relationship between the level of taxes and economic growth.  If taxes are too low, the government puts too little money into the economy to promote growth.  If taxes are too high, the government takes too much money out of the economy, slowing growth. 

There’s a sweet spot when the tax rate is just right.  At that point, taxes allow government to play its proper role in the economy and individuals and companies the right amount of money to keep the economy growing.  Nobody knows where that sweet spot is; it’s a matter of opinion. 

The BBB would lower taxes and could be enacted with only loyal Trump GOP votes. The euphoria of the federal government under a single party and the resulting belief that it could easily enact the president’s proposal are now meeting the realism of American politics. 

The iron law seems to be that the people – even conservative Republicans – expect much from government but do not want to pay enough taxes to get it.  They reasonably add some debt to the mix, though they must avoid letting debt service feed on itself, always growing greater.

Here’s what the BBB would do.

First, it would extend major tax cuts for individuals that are set to expire and create new tax breaks, ranging from no tax on tips to lower rates for the wealthiest taxpayers.  These add up to huge tax breaks that Trump promised in his campaign.

Second, it would cut spending to pay for some of the tax reductions.  To even begin to raise enough money, it would require slashing Medicaid, green energy support and much else.

Third, it would inevitably increase the national debt to pay for the tax cut costs not covered by spending cuts. For that purpose, the debt ceiling, which is little more than a symbolic political gimmick, would have to be raised.

This combination is causing big trouble for Congress and may result in Trump’s BBB falling well short of his promises.

The individual tax cuts were set to expire after Trump’s second term, assuming he had been re-elected in 2020.  Because he skipped a term, they expire during his presidency.  He would make them permanent, but that is costly.  Added tax cuts, promised in the campaign, would massively increase the national debt.

The neutral Congressional Budget Office says the BBB could increase the national debt by $2.8 trillion over the next 10 years.

Traditional GOP conservatives reject increasing the national debt.  Even for their president, they cannot accept trillions more of new debt.  Some creative bookkeeping to disguise debt is supposed to satisfy them, but it is not working.

Debt service is now greater than either national defense spending or Medicaid, and conservatives are looking for debt reduction not a further increase. 

As for spending, the budget cannot be cut the way Trump and Elon Musk would like.  The budget deficit is not simply a matter of wild Democratic spending.  Instead, it results from members of Congress responding to the demands, needs and desires of the voters.

Constituencies composed of millions of voters favor Medicaid for the poor, health research, renewable energy development, farm payments and a myriad of other government programs. Members of Congress cater to their constituents to stay in office. They support most federal appropriations and protect each other’s priorities.

The worst is yet to come. Social Security will soon stop paying for itself.  Voters are likely to oppose massive cuts to it.  Congress will have to find funding.

Right now, Trump doesn’t have the votes for BBB.

While spending cannot be cut as Trump wants, there’s room for some reductions. Nothing should be automatic.  Each agency should have to justify regularly all its spending subject to line-item review, not a Musk meataxe. The president and GOP Congress can set their priorities, like killing foreign aid, but cannot achieve them all.

The Laffer Curve stands in the way of a tax increase.  Republicans see the U.S. as being past the sweet spot, suggesting that a tax cut would boost the economy, increase government revenues, and pay for itself.  There’s no historical evidence supporting such optimistic expectations.  The unforeseen economic effect of the Covid pandemic proves that.

The answer to finding a sound federal budget without endless debt increases must be a combination of setting spending priorities and tax increases.  Voters must accept the need to pay for the government services they want. 

It’s time to stop hiding behind the self-serving appeal of the Laffer Curve and recognize that tax increases on upper income people must come. 

U.S. becomes economic island; Trump's tax increase

 

Gordon L. Weil

In his avalanche of actions, President Trump has adopted an across-the-board tax increase. Like many of his other moves, he should have asked Congress to approve, but he chose to act on his own.

He is using powers meant for a true national emergency to radically increase tariffs as he launches his personal view of trade policy and seeks to use trade as a weapon against other countries, both friends and allies. 

Trump’s trade policy is aimed at making the U.S. economically self-sufficient.  The rest of the world sells more to the U.S. than America sells to them.  Trump charges they profit because they cheat.  In his view, the U.S. buys imports at rigged, low prices, rewarding countries that use their profits from enormous U.S. sales to subsidize their own economies.

He uses tariffs to force up the price of imports.  As import prices rise, higher cost American goods can compete.  In fact, U.S. producers may be able to raise their prices.  After claiming he would restore the economy and combat high prices, he has admitted that prices will rise because of his tariff policy and the country might face a recession. That’s hardly what he promised.

Higher prices are the taxes he imposes to finance his notion of the proper role of tariffs.  But the price is wrong. And Congress did not give the president emergency authority to use tariffs as he does and effectively raise taxes.

The U.S. is the world’s only economic superpower, for the time being at least, and Trump takes advantage of its strength to remedy what he sees as the victimization of the U.S. and to force other countries into line.  By his unchecked action, he raises prices. That has the exact same effect as if Congress had raised taxes to support a new policy.

Trump’s view fairly recognizes that traditional free trade does not always work.  Countries must have market economies where buying and selling are free for free trade to work.  But some countries that benefit from the low tariffs that are part of free markets have state-run economies that allow them to take unfair advantage of the system.

Take China, the worst offender.  Robert Lighthizer, Trump’s trade guru, correctly opposed China’s admission to the tariff-cutting World Trade Organization, because of its state-run system.  It became a WTO member by lying about its intentions.  Countries like China have made a mockery of free trade, but U.S. consumers lap up their lower cost goods.

Higher consumer costs are not the biggest problem.  Underlying Trump’s policy are several economic assumptions that have been disproven.

Much trade is based on economic efficiency, with countries specializing in production where they are strong. Trade naturally favors exchanges among countries selling what they are best at producing and buying from others whose goods are better or cheaper than their own.  That’s an efficient division of trade.

Trump complains that most other countries are using the system to take unfair advantage of the U.S.  That ignores the role of consumers in a market economy.  A nation’s import-export balance usually results more from what its domestic market wants than the trade treachery of others.

The U.S. depends on some countries for essential resources, like rare earths, uranium and even some types of oil.  A tough trade policy can get in the way of meeting essential needs.  As an alternative to easing trade policy, Trump pressures Ukraine to become a major low-cost supplier of rare minerals supposedly to repay American aid to its defense against the Russian invasion.

The Trump trade policy also ignores the reaction of other countries.  He assumes they will have to accept the loss of sales to American competitors.  He has argued they will pay more tariff revenues that will fatten the federal budget, though he increasingly recognizes that those revenues will ultimately come from American consumers when they pay higher prices.

He has little obvious concern whether, faced with American protectionism, foreign governments will reject his “beggar thy neighbor” policy.  But they retaliate, trying to reduce their U.S. imports and to punish the U.S. for its tariff increases.  The U.S. itself then retaliates. This spiral is the essence of a trade war.

Finding the U.S. an unreliable trading partner, other countries are likely to seek new trade relationships. The world economy can be reshaped if Trump persists.  For example, Canada could consider joining the EU customs union to replace its former free-trade relationship with the U.S.

As world commerce reconfigures, the U.S. dollar would lose influence as the most accepted reserve currency.  With that loss goes much of American economic power in the world.  

The political equivalent of protectionism is isolation and the loss of world power.  That could happen if Trump’s “America First” turns the country into an economic island.