Wednesday, 21 February 2018 11:05


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Michael S. Swisher

Michael S. Swisher is chairman of the board of Religion and Society, the foundation that publishes The St. Croix Review.

Do Cuts in Tax Rates Cause Deficits?

The tax reform bill recently passed by Congress and signed by President Trump cut the corporate income tax rate from 35 percent to 21 percent, reduced personal income tax rates slightly, and cut the rate at which income from so-called “pass-through” business entities such as subchapter S corporations and limited partnerships is taxed to their owners.

One argument that opponents of cutting tax rates always advance is the claim that doing so leads to deficits. Many of the opponents of tax rate cuts are, to be sure, leftists, who regard business and “the rich” as enemies, and the tax code as a stick with which to beat them. On the other hand, even supposedly conservative writers fall all too easily into the habit of assuming that reductions in tax rates necessarily imply reductions in tax revenues.

One example is the National Review writer Kevin Williamson, who recently wrote: “It [the tax bill] will also add about $1.5 trillion to the national debt.”

This claim takes “static scoring” at face value. It is based on the favorite assumption of economists, cœteris paribus — a Latin phrase meaning, “all other things being equal.” Yet, in real life, they never are. Taxes are the price of government, and like any price they are subject to the law of diminishing marginal returns. People change their economic behavior in response to taxation, just as they do when any price rises or falls.

Tax rates and tax revenues never change in direct proportion. Is it too much to ask that persons writing about economics be familiar with the data?

The cuts in tax rates during Ronald Reagan’s and George W. Bush’s administrations are often blamed for the deficits that occurred during their time in office. For this to have been the case, tax revenues would have had to fall — and they did not.

Total Federal tax revenues in fiscal year (FY) 1980, the last full fiscal year of Jimmy Carter’s administration, were $517.112 billion. In FY 1981 they rose to $599.272 billion; in 1982 to $617.766 billion; in 1983 they fell to $600.562 billion; in 1984, rebounded to $666.438 billion; in 1985, rose to $734.037 billion; in 1986, to $769.155 billion; in 1987, to $854.288 billion; in 1988, to $909.238 billion.

Thus, during the entire administration of Ronald Reagan, Federal tax revenues each year exceeded those collected during the last, or any previous year of Jimmy Carter’s, and rose every year except for FY 1983. The highest revenues were those collected in 1987 and ’88, during which the maximum personal income tax rate was reduced from 50 percent to 28 percent.

In FY 2003, the year during which the 2003 so-called Bush tax cuts were passed (which reduced the Federal tax rates on qualified dividends and capital gains to 15 percent), total Federal tax revenues were $1,782.314 billion. In 2004 they rose to $1,880.114 billion; in 2005, to $2,153.611 billion; in 2006, to $2,406.869 billion; in 2007, to $2,567.985 billion; in 2008 they fell to $2,523.991 billion, signaling the start of the recession.

All of the above information is readily available on the informative website of the Tax Foundation.

Deficits in the referenced periods occurred because spending exceeded revenues — not because revenues fell.

Williamson cannot bring himself to say anything in Trump’s favor — so he wants to blame the tax bill in advance for deficits that will undoubtedly occur in the future. Yet if the past is any guide to the future, the cuts in tax rates just enacted will not result in lower revenues. Deficits will originate, as they have before, from a failure to restrain spending.

One benefit of Trump’s policy goals, if he can achieve it, would be a reduction in the number of low-skilled unassimilable aliens present in the United States. They undoubtedly inflate the welfare rolls and will do so at an increasing pace unless their numbers are dramatically reduced. Higher welfare expenditures socialize the cost of the private benefit that the wage-depressing effect of untrammeled immigration delivers to employers of unskilled labor.

We conclude with the observation that a really good way to reduce entitlement spending would be to quit importing future welfare beneficiaries.

Is Trump Really a Protectionist?

We constantly hear that President Trump is a “protectionist.”

What protectionist measure has Trump actually put into force? The only concrete action he has taken of this kind has been to impose “safeguard” tariffs on imported solar panels and washing machines. This was done in response to petitions under existing U.S. trade law, using presidential authority last exercised in 2002 by no less a free-trader than George W. Bush. According to the Washington Post:

“In the solar panel case, massive Chinese government subsidies and industrial planning were blamed for a surge in China’s production of solar cells and modules, and the demise of up to 30 U.S. solar panel makers. China’s share of global solar cell production rose from 7 percent in 2005 to 61 percent in 2012, according to the USTR.”

“In the dispute over washing machines, the Commerce Department imposed duties on South Korean washing machine makers Samsung and LG in 2013 in response to Whirlpool’s complaints that its rivals were receiving government subsidies and selling their products in the U.S. below the cost of production.”

It is not clear that in such egregious cases, any other president might not have done the same. Indeed, this use of existing statutory authority is a useful reminder that the status quo is not one of “free trade” but rather one of managed trade, as it always has been.

For the most part, the difference between President Trump’s approach to trade issues as compared to that of previous incumbents has been in his public skepticism about multi-lateral trade agreements such as NAFTA, and his expressed willingness to threaten protectionist actions, rather than to take them.

Threatening to do something — in this case, to impose punitive tariffs — is not the same as doing it. Threats can be a useful negotiating strategy, as no doubt Trump has found in business.

It is somewhat surprising that none of the defenders of multi-lateral “free trade” arrangements who usually attack Trump for his “nationalist, protectionist” positions has noticed a recent article from The Financial Times. Its headline reads:

“China Offers Concessions to Avert Trade War with U.S.”

The article goes on to remark,

“China will offer the Trump administration better market access for financial sector investments and U.S. beef exports to help avert a trade war, according to Chinese and U.S. officials involved in talks between the two governments.”

So, here is an instance where Trump’s tough words prompted a trading partner to level the playing field a little bit more in America’s favor, with the result that China (which has been unapologetically mercantilist in its own trade policies) now has fewer, not more, barriers to competition from American businesses.

Apparently his critics would have preferred that Trump hadn’t secured freer trade with China in a way that was to American advantage.

Similarly, the reduction in corporate tax rates has now made manufacturing in America more attractive than it was, to the extent that it has caused China to respond with tax breaks of its own. From the Mercury News:

“China offers tax breaks to counter US tax cuts.”

Australia has also taken notice. From The Guardian:

“Scott Morrison says Australia needs tax cuts to offset hit from U.S. cuts”

Note that no tariff or duty has been imposed — instead, business tax cuts in the U.S. have made American products more competitive. Can those who attack Trump on trade explain how such “protectionist” results are so terribly bad for the United States?

New York Still Above Water!

According to a prediction made in 2008 by James Hansen, the former director of NASA’s Goddard Institute for Space Studies, a significant part of Manhattan was supposed to be submerged by 2018. He claimed that: “The West Side Highway (which runs along the Hudson River) will be under water. And there will be tape across the windows across the street because of high winds. . . . ”

The New Year has arrived — and this has not happened, nor is there any indication that it will in the immediate future.

Does anyone remember the Club of Rome, and the disaster predictions of Paul Ehrlich, who forecast a future of desperate shortage? Julian Simon proposed a bet of a market basket of commodities — if their prices went up, Ehrlich would win; if they went down, Simon would win. Simon won; no shortage materialized.

Does anyone remember the predictions of “Peak Oil”? There was no peak; the U.S. is now the world’s largest producer of petroleum — fracking having opened previously undiscovered supplies — and proven reserves are larger than ever.

Now, New York remains above water, despite Hansen’s prediction.

It is time to recognize that these people are not relying on “settled science,” but are rather acting in the tradition of apocalyptic prophecy. As so many people have abandoned the faith of their fathers, something has to fill the empty space left in their consciousness by its absence. For some it is occultism; for others, it is the existence of extraterrestrial life; and for others, it is the cult-like environmentalist prophecy of doom.

It is not surprising that Hansen is without embarrassment or shame — neither were the Club of Rome, Paul Ehrlich, or the “peak oil” prognosticators.

I am reminded of the Millerites, who anticipated the second coming of Christ “sometime between March 21, 1843 and March 21, 1844.” When it failed to happen, they first re-calculated that it would take place on April 18, 1844; then on October 22 of the same year. After that day passed like any other, the sect referred to it as “The Great Disappointment.” So, no doubt, it is for Hansen. He will persist in his delusion to the grave. The sad thing is that his followers are still so numerous and so over-represented in positions of influence over public policy.   *

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