Some of the good things tax cuts produce are ephemeral; others could backfire.
No matter what any given day’s or week’s political news cycle focuses on — guns, immigration, abortion, appropriations, tariffs, or the chaos in the White House — there’s no question Republicans are staking their hopes for mitigating midterm losses on the alleged effects of their December 2017 tax cut bill. Here’s how Ron Brownstein sums up the sentiment within the GOP:
Republicans expect that if voters believe the party is putting more money in their pockets, even many people recoiling from Trump’s performance will still vote to maintain GOP control of Congress. That’s why so many Republican strategists believe that talking up the tax plan is the key to avoiding a worse-case scenario this fall. “For Republicans, it’s absolutely the most important thing,” said Liam Donovan, a GOP lobbyist close to the party’s congressional-campaign strategists. “There are other things they can’t control—this is something they can.”
As everyone has noticed, the polling on the popularity of the tax cuts has trended favorably toward the GOP in early 2018. But it’s not like swing voters are dancing in the streets and singing hosannahs to the great benefactors in Washington who had the courage to blow up the budget and rain dollars on their donors and cents on their rank-and-file constituents. So Republicans will continue to talk up the tax cuts until — well, if not the end of time, then until November.
But it’s worth taking the time to sort out the claims they are making about the bill, if only because their salience could change pretty quickly. There are three major and distinct talking points the GOP is relying upon:
1. The tax cuts mean more money for you, right now, middle-class voters!
The most obvious argument is that the changes in deductions and tax rates will reduce the net tax liability of the average family, with the boost in the standard deduction and child tax credits being the most important bottom-line bonanza for the stereotypical married couple with two kids. This benefit is now being implemented, for those taxpayers whose income is primarily in wages, by withholding adjustments that boost take-home pay. Happiness over that modest bump will presumably be regenerated whenever said family files its 2018 taxes — but that will be well after the midterm elections.
Make no mistake, the short-term take-home pay bonanza will be offset for some upper-middle-class taxpayers concentrated in high tax states, who will lose the full deductibility of state and local income and property taxes.
A wild card is the psychological effect on the significant number of taxpayers who will no longer have to claim itemized deductions. But this “simplification bonus,” if it exists, will not be fully realized until 2019.
2. Corporations are joyously sharing their tax cuts with workers.
This claim, which is very close to being a pure expression of what Democrats call “trickle-down economics,” is based on highly publicized examples of corporations announcing bonuses or pay increases for employees and attributing that largesse to the tax cut bill.
Like the withholding adjustments, this is pretty much a short-term phenomenon, though it will have long-term effects on the employees who directly benefit. But it’s becoming clearer each day that corporate beneficiaries of the tax cut are spending most of their windfall not on bonuses and wage hikes, or even on capital investment, but on buying up their own stock, as the New York Times reports:
And while stock buybacks may make the economy look stronger by boosting stock prices, the direct benefits are pretty narrow:
So many of the same individuals who received the most personal benefits from the tax bill get a second scoop of fiscal ice cream through corporate tax cuts leading to massive stock buybacks. So that invests even more importance in the third and most familiar GOP talking point for tax cuts:
3. The 2017 tax bill will usher in a period of sustained economic growth.
Like the completely erroneous GOP prediction back in 1993 that Bill Clinton’s budget (which included modest tax increases) would destroy the economy, the mirror-image prediction that the 2017 tax bill will lead to an economic golden age has the obvious vulnerability of being subject to rebuttal by actual events. At the moment, of course, macroeconomic indicators are mostly quite positive, though not sharply better than they were when Barack Obama was in the White House. But Trump and his party are benefitting from optimistic perceptions of the economy’s performance. And the longer the current upturn continues, the more Americans will identify it with the 45th president rather than the 44th.
But there are some economic storm clouds on the near horizon that could rain on the GOP’s parade. The most important is the possibility that inflation fear — spurred especially by recent signs of modest wage growth — could lead the Fed to raise interest rates more frequently than originally planned. Indeed, even the very thought of accelerated interest rates caused a major stock market buyoff earlier this month. Yes, the markets largely recovered, but the instability in economic expectations the markets have exposed should worry anyone who believes steady growth is an important political asset for the party running Washington. And while new Fed chairman Jerome Powell looks to be determined to emulate Janet Yellen’s focus on not rocking the economy very hard, there are a lot of conservative opinion leaders who might even prefer a Democratic House in 2019 to a return to the original economic sin of inflation.
The thing to remember here is that no politicians have ever welcomed an economic slowdown. They happen anyway, and when they do at a time when the party in charge of the federal government is predicting hypergrowth and a general outbreak of good times, the backlash can be savage.
The question Ron Brownstein raises is whether Democrats will prove nimble enough to call into question any or all of the GOP claims about the beneficial effects of the tax bill. He recommends the time-honored if somewhat complicated argument that the effects of the tax bill on the budget deficit will inevitably lead Republicans to pursue cuts in Medicare (which most of them would like to pursue in any event on ideological grounds).
