tax cuts

Problems with a “Fiscal Trigger”

Fiscal rules can theoretically improve policy by eliminating “time inconsistency” among lawmakers. But the proposed fiscal trigger being discussed in the Senate tax reform bill would be a terrible fiscal rule.

You can see the thinking. Several senators worry about tax cuts blowing a big hole in the public finances. If they do not have the desired impact on economic growth, resulting in less revenue than expected, the budget deficit will grow and drive the national debt even higher. Concerned senators therefore seek a mechanism whereby if revenues are lower than expected, tax cuts will be partially reversed.

It’s welcome that some senators take the US federal government’s burgeoning national debt seriously. But there are obvious flaws with this plan (though we do not know details as yet), some of which have been discussed widely already.

First, how exactly will deviations in revenues be judged? An economy is a complex organism, and it is difficult to disentangle how much any change in revenue relative to forecasts is due to changes in tax rates as against other factors. Just look at the debate in the UK. Last week, the Daily Mail newspaper published a report that tax receipts following corporate tax cuts there had been much higher than expected. But experts from the Institute for Fiscal Studies pointed out that much of this was due to a faster recovery of corporate profits in the financial sector and the effects of Brexit, which had little to do with the changing rate. Under a trigger which merely judged revenues against forecasts, a host of things that affect revenues (both upwards and downwards) could be chalked up as the effects of tax policy, potentially resulting in damaging tax rises.

Then, as J.D. Foster notes, there are likely to be other tax policy changes and changes in growth forecasts in future years too. How will these be disentangled and the effects of this specific Act isolated? Will the trigger apply to just a particular revenue stream, such as corporate income tax revenues, or more broadly to capture all the spillovers of any investment boost? If the former, the probability that the trigger will be activated is highly dependent on the accuracy of any analysis of the incentives to incorporate versus operating as a passthrough. In other words, there are huge unknowns here.

Lots for Economists to Like in the House GOP Tax Plan

Debating the implications of the GOP tax plan, most analysts speak past each other. That’s because there are 3 prisms through which changes can be assessed: the implications for efficiency and growth, the impact on the public finances, and the distributional impact across income groups.

Is Fiscal Constraint a Bug or a Feature?

A Washington Post profile of Art Pope, political donor and now budget director of North Carolina, finds a flaw in his fiscal management:

For all of his pull, the revolution Pope helped set in motion is not going quite as planned. The tax overhaul, styled in part off ideas promoted by Pope-backed groups, has contributed to tight finances in North Carolina at a time when other states are flush with cash.

If There’s a Grand Bargain, Taxpayers Should Get a Tax Cut Rather than a Tax Hike

The Washington metropolitan area has become America’s wealthiest region because trillions of dollars are taken every year from the productive sector of the economy and then divvied up by the politicians, bureaucrats, lobbyists, and interest groups that benefit from federal largess.

But there’s always an appetite in Washington for even more money. Former senator Kent Conrad (D-ND) just wrote in the Washington Post that “Our country needs more revenue to help us get back on track.”

I guess that means back on track to becoming Greece, though I suspect he would have an alternative explanation. All I can say for sure is that he probably wasn’t paying attention when I testified to his committee last year about pro-growth tax policy.

But it’s not just Democrats who are greedy for more of our money. Republican Congressman Tom Cole of Oklahoma joined the Charlie Brown Club by stating, “we’re willing to put more revenue on the table.”

If you ask politician why they want more revenue in Washington, they invariably state that America’s long-term fiscal challenges are so large that you need a “balanced” package.

But why should there be “balance” between tax hikes and spending cuts (which would merely be reductions in planned increases) when more than 100 percent of America’s long-run fiscal problem is because of a rising burden of government spending?

Does that sound like an exaggeration? Well, check out this data from the Congressional Budget Office’s 2013 Long-Term Budget Outlook.

‘Tax Cuts’ and Welfare Spending

A story in the Washington Post today is headlined: “Obama Would Keep $85 Billion in Tax Breaks for Working Poor.”

The “tax breaks” in question are expansions in the earned income tax credit and the child tax credit. The Post story repeatedly calls the expansions “tax breaks” and “tax cuts.” The budget expert quoted in the story calls them “tax cuts,” and so does a House staffer and a spokesperson for the president.

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