President Donald Trump’s former chief economic adviser, Gary Cohn, spoke out against his former boss’ trade policies recently. He said the result of Trump’s trade war with China as well as traditional U.S. allies could cancel out the economic benefits of the Republican tax cut package that passed last year.
“If you end up with a tariff battle, you will end up with price inflation, and you could end up with consumer debt,” Cohn, who served as director of the National Economic Council in the Trump White House until March, told The Washington Post last month. “Those are all historic ingredients for an economic slowdown.”
It’s heartening to see a former member of team Trump speak out against the president’s reckless trade policies. Certainly, those policies pose some danger to economic growth and could very well cancel out any economic benefit from the tax cuts, which were not widespread.
It’s worth noting, however, that the tax cut package doesn’t offer an unqualified benefit to the nation. In fact, only 4 percent of American workers have received raises or bonuses tied to the tax cuts.
This is reinforced by a recent analysis of the tax cut package from four experts at the Urban Institute and Brookings Institution’s Tax Policy Center. They tried to assess the package’s overall effects, both short-term and long-term.
The experts conclude the tax cuts offer some economic stimulus in the short term, and that any stimulus shrinks over time. The tax cuts will lead to greater after-tax income, the analysts note, but the benefits will be unevenly distributed: The top 1 percent of households will see a significantly greater benefit than the bottom 20 percent.
The top 20 percent of households will see their after-tax income rise by 2.9 percent on average, the economists estimate. The income bump, on average, for the bottom fifth of households will be just 0.4 percent. The top 1 percent of households, they estimate, will see a 3.4 percent income bump; the next 4 percent of households will see their after-tax income rise the most: by 4 percent.
The important consideration, however, is how the country pays for tax cuts that stand to balloon the federal deficit and the national debt. That’s, perhaps, the most significant unanswered question.
Increased borrowing to finance the national debt, the experts note, will increase the costs of borrowing overall, raising interest rates for everybody else who needs to borrow money. If policymakers finance the tax cuts by cutting federal spending, the tax cuts’ benefit likely turns into a liability.
The authors lay out the consequences of the policy in stark terms in the introduction to their paper:
The tax cut legislation “will make the distribution of after-tax income more unequal. If it is not financed with concurrent spending cuts or other tax increases, [the Tax Cut and Jobs Act] will raise federal debt and impose burdens on future generations. If it is financed with spending cuts or other tax increases, TCJA will, under the most plausible scenarios, end up making most households worse off than if it had not been enacted.”
In other words, Republicans passed the tax cut package in hopes of having something to show voters and their campaign donors from two years of controlling all three branches of the federal government.
Perhaps the GOP will garner a political benefit. But the party’s short-term political benefit, under any plausible scenario, appears likely to come at the expense of most of the voters who would be delivering that benefit.
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