As I write this, the United States Senate is in the middle of what could prove to be an epic week. To tax or not to tax is the question, and none of us, including our representatives, know the answer to that inquiry.
The cuts as proposed will be sweeping in nature. Gone will be deductions taxpayers across the land have come to know, love and hate all at the same time. Charitable deductions, state and local taxes, business expenses all removed as line items for deductions. In fact, practically every tax reduction we have come to know is on the table to be repealed.
And it all is President John F. Kennedy’s fault.
First, and simply as an aside, there is no credible evidence Hilary Clinton was the shadowy figure on the grassy knoll in Dallas.
The drive for tax cuts really started in the early days of the administration of what the public came to know as the New Frontier.
Kennedy beat Nixon, barely, by promising to “get this country moving again.” He came to office following an understandably admired President Eisenhower, but the economy and the national mood was depressed. Three recessions in the eight years of Ike’s tenure, coupled with the perception we were losing the space race to the Soviet Union, led the public to demand action.
To spur the economy and remove the danger that the country was again drifting into recession, Kennedy proposed in 1961 a targeted tax cut to stimulate growth. It accelerated the depreciation schedule on business machinery and equipment and provided a 7 percent credit on new purchases. Cutting taxes worked.
Cutting taxes to increase consumer spending slowly became the philosophy of advocates for supply side economics. Simply put, this doctrine holds the government’s tax power is drawing money out of the economy, money that could spur growth, investment and job creation. If taxes are cut, the increased activity will more than generate a healthy economy and, at the same time, replace the lost revenue.
It is this theory that is driving the GOP’s effort to pass the tax bill. Their economists believe it will work and it meets a political need.
Joe Scarborough, the host of “Morning Joe,” recently observed we have had three Republican presidents out of the last five. Two, he wrote, cut taxes (Reagan and George W. Bush) and won re-election. The third, George Herbert Walker Bush, did not and lost.
Nothing enhances an incumbent’s chances for re-election better than an economy that is robust in an election year. Plus, large donors to the GOP are demanding it. One congressional representative was quoted as saying, “If we don’t pass tax reform, I’ve been told not to call.” Don’t be alarmed about this factor. Politics as well as philosophy always interact when the levers of government power are moved.
Assuming this effort passes there are unintended consequences half of the Congress isn’t considering.
We are not living in the era of Camelot.
The recent recession was halted, in part, by the action of the Federal Reserve pumping money into lending institutions through a process called quantitative easing. It is time for the agency to start selling off the bonds and mortgage-backed securities it obtained, which total almost four trillion dollars.
We have never had this combination of bond sales, low interest rates and a massive tax cut at the same time. No one knows how these three will impact the economy.
If the tax bill reaches the cost the Congressional Budget Office estimates, which over 10 years is a $1.4 trillion deficit, where is the money within the Treasury for the badly needed infrastructure bill that was supposed to replace our aging bridges and highways?
After tax cuts, low prime interest rate and quantitative easing have been used, what happens if the economy goes south again? We are out of tools traditionally used to ward off the harsher aspects of it.