Zombie ideas and tax cuts

A version of this column originally appeared in The Alpena News.

In 2017, Congress and the Trump administration passed the Tax Cuts and Jobs Act (TCJA), one of the largest overhauls in our tax system since the Tax Reform Act of 1986. It is a law built off an outdated economic theory called supply-side economics (commonly known as trickle-down economics), which states that removing barriers to boost supply will inexorably spread the wealth out to everyone. Proponents of such tax cuts claim that they will “pay for themselves” and the savings will spread out to everybody. Same story, different day.

Instead, the TCJA exploded the deficit in the years that followed and was a massive economic windfall for the wealthiest households and largest corporations. The highest earners and wealthiest business owners saw the largest increases in after-tax income compared to low-income households — which saw little to none. The promises of wealth trickling down and a surge of economic growth never happened, and the average American (and average Michigander) is stuck wondering, where has all this money gone? Most of the provisions are set to expire this year, these ideas just keep coming back. This time will not be different. Same story, different day.

Nobel prize economist Paul Krugman refers to the economic philosophy that underpins these tax cuts as “zombie ideas” because no matter the evidence to the contrary, these ideas never seem to go away. The promises of getting rich quick and the charitable billionaire coming to save the day never seem to pan out as advocates predict. The Trump administration plans on making these regressive tax cuts permanent and shrinking the already too-low corporate tax rate — the true centerpiece of the TCJA — even further (from 21% to 15%). Extending these tax cuts will also be devastating for the national debt, and will exacerbate racial inequalities that already exist in the tax code. For example, 80% of the savings in the TCJA went to white households, despite making up 67% of the total population.

For people here in Michigan, the TCJA will disproportionately favor the rich. For the bottom 20%, the average tax savings will be $90, while the middle 20% will save $930. This is not nothing, and this money will be put to good use, but the TCJA extensions will save a whopping average of $35,970 for the top 1%. To pay for these tax cuts, lawmakers will look to gut Medicaid and the Supplemental Nutrition Assistance Program (SNAP) — programs that hard-working residents of northeast Michigan and across the state rely on. Everyday Michigan families will bear the burden of this tax giveaway to the rich.

Tax cuts are most helpful when given to those who are more likely to spend the money instead of saving it. Not only is the TCJA bad economics, it is neither pro-growth nor equitable. It was more like a short-term sugar rush of cash than a hard-nosed and strategic plan for long-term development. The TCJA was everything but fiscally prudent. Most disappointing of these results is the lack of wage and employment growth in the TCJA’s wake. Contrary to the promises of the TCJA’s biggest proponents, wage and employment growth slowed in the two years after the TCJA compared to the two years prior. Furthermore, the creation of new firms fell considerably after the passage of the TCJA. 

Yet, the zombie remains alive and well, and because of the Republican trifecta in the federal government, a simple and partisan majority is all it will take to extend it indefinitely. This is not a one-time thing; supply-side economics have been tried and failed not only in the federal government, but in states like Kansas, which raised taxes after the devastating results of Gov. Sam Brownback’s proposals.

This is not to say that there aren’t provisions of the TCJA worth continuing. However, these provisions are minor in scope to the rest of the TCJA and are largely used as political cover to obfuscate the true nature of these laws, as well as beguile voters into approving “tax cuts.” Instead of revitalizing this zombie for another go-around, Congress should focus on pro-growth and equitable principles that help the economy, such as letting the top tax cuts expire, reversing the corporate tax cut, and taxing incomes that disproportionately favor rich and white households, such as capital gains taxes.

Instead of hoping that this wealth will “trickle down” yet again, tax revenue should be devoted to pro-growth and equitable policies like investments into poverty reduction, healthcare, infrastructure and education. The only way for pro-growth policies to “pay for themselves” is to actually pay for them.