Clinton needs to address Trump's tax-cut mythology
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Republican nominee Donald TrumpDonald John TrumpSenate advances public lands bill in late-night vote Warren, Democrats urge Trump to back down from veto threat over changing Confederate-named bases Esper orders ‘After Action Review’ of National Guard’s role in protests MORE’s claim that tax cuts would automatically make the economy take off like a “rocket ship” resulting in higher economic growth and employment is not supported by even the most committed free-market economists.
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What’s more, Democratic nominee Hillary ClintonHillary Diane Rodham ClintonWhite House accuses Biden of pushing ‘conspiracy theories’ with Trump election claim Biden courts younger voters — who have been a weakness Trayvon Martin’s mother Sybrina Fulton qualifies to run for county commissioner in Florida MORE’s excessive focus on Trump’s failure to disclose his tax returns could very well be a trap set by him to avoid the harder questions about the economic benefits of tax cuts.
Hillary’s released her medical information and tax returns.
We’re still waiting for Trump to do the same. https://t.co/bxHbFLs24l
— Hillary Clinton (@HillaryClinton) September 14, 2016
The Congressional Research Service (CRS) found that tax cuts on income, dividends and capital gains have had a negligible effect on economic growth since World War II and that the fastest economic growth occurred in the 1950s, when the top tax rate was more than 90 percent.
The Brookings Institute also noted that:
Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts, they will likely also result in an increased federal budget deficit, which in the long term will reduce national saving and raise interest rates. The net impact on growth is uncertain, but many estimates suggest it is either small or negative.
Tax cuts certainly were not the cause of job growth during the Bill ClintonWilliam (Bill) Jefferson ClintonWill the ‘law and order’ president pardon Roger Stone? Five ways America would take a hard left under Joe Biden The sad spectacle of Trump’s enablers MORE and Ronald Reagan administrations; both presidents increased taxes. Further, high taxes in some countries have sustained growth and acceptable levels of employment.
Spending cuts inevitably follow tax cuts that have been the single largest contributor to the budget deficit, and there is no evidence that tax cuts pay off themselves. Trump doesn’t explain where these spending cuts are likely to occur, or the implications of those cuts for growth and employment that do not compromise social and environmental equity and justice and national security.
In a highly competitive market, government spending is crucial for stimulating growth and employment. But as private investors’ primary motive is profit, tax cuts will not suffice to increase investments in education, research and development, and human capital development, which are necessary for economic growth and employment.
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The direct economic returns on investments in these vital sectors can appear less certain, take time and may not appear socially and environmentally efficient. Therefore, investments in these sectors will likely suffer and hinder growth and employment if the tax reductions are not accompanied by plans to cover other essential expenditures such as defense, an essential sector for U.S. global economic and political interests.
Trump suggests other world powers will contribute, but he fails to explain what incentive countries will have to pay for U.S. international military expenses.
Furthermore, tax cut-induced increases in income do not necessarily translate into an increase in consumption. Limits to consumption involve a variety of factors. People may find their current levels of consumption satisfactory, or choose to increase their savings, engage in speculative investment, pay off outstanding debt or limit consumption to improve environmental sustainability.
Moreover, these responses vary along lines of income, race, gender and other social differences, leading to unpredictable tax cut effects. In fact, the Tax Policy Center study shows that “the bottom four-fifths of households will lose more than they gain from the combination of tax cuts and the financing for them.”
Tax cuts alone will not expand the scope of economic activity. They do not dictate levels of investment, risk-taking or entrepreneurial activity. Investors may utilize money saved in areas that are irrelevant for growth and increased employment. Tax cut impacts on small business are negligible when their taxable revenue is so small and they pay other taxes, such as estate taxes. Consumers may not invest their increased income from tax cuts in enhancing the education and skills necessary to increase their competitiveness in the labor market.
Further, tax cuts do not prevent outsourcing when they are unable to match the legal and illegal opportunities available for investors to maximize profits.
At the current levels of market integration, it is inconceivable that tax cuts will incentivize the return of investment to the United States.
Investors’ complacency with their increased earnings following tax cuts prevent them from expanding and improving the efficiency of their businesses. A 2016 study by the Citizen Center Justice shows that Fortune 500 companies are holding nearly $2.5 trillion in accumulated profits in offshore tax haven subsidiaries to avoid paying taxes on much of their income, rather than investing in the country.
Indeed, “smart investors” can exploit tax cuts and tax loopholes to cover up losses from bad business deals and decisions.
Trump-style populist tax policies conceal the reality of taxes in a market economy: that the wealth upon which the taxes are levied is really produced by workers and, other than wages paid to the workers, the wealth is appropriated by the investors. Employers rarely transfer their tax-cut gains in income to the labor force. Inflation and debt further reduce potential tax cut benefits to labor.
That is precisely why tax cuts continue to increase the concentration of wealth in the hands of the top 1 percent of the global population, which in turn offsets the expected economic and social returns.
Making sense of Trump’s proposed tax cuts requires details he has failed to supply: He has offered no plan to address the well-documented negative consequences of tax cuts.
Donald Trump’s populist tax-cut policies are easily refutable, yet they will continue to appeal to people as long as Hillary Clinton focuses on Trump’s personal tax avoidance issues instead of explaining to the public how her economic policies would address the limitations of Trump’s proposed tax cuts.
Fernando is associate professor of International Development and Social Change in the Department of International Development, Community and Environment at Clark University in Massachusetts.
The views expressed by contributors are their own and not the views of The Hill.