Doing stupid stuff with the economy

President Obama’s foreign policy doctrine was famously characterized as “Don’t do stupid s— (stuff).” I won’t weigh in here on the current president’s foreign policy, but I can assert that his economic policy has clearly veered into “stupid stuff” territory.

I spent the better part of twenty years in the academic publishing business attending far too many meetings of professors with their fellow discipline members. The economists’ meeting research paper presentation sessions were particularly deadly, but they did instill in me a few principles by which I still interpret economic policy:

  1. The economy is really complicated. It is the sum of every economic-related transaction each one of us does, some of it rational and some not.
  2. The big players are the epitome of “economic game theory” at work, each one moving and finessing every day, seeking incremental advantage over everyone else, sometimes successfully and sometimes not.
  3. Good economists disagree with each other. As a result, there are a lot of opinions as to the best policies going forward. But with every move by a government or a major market player, there will be an equally big move to obviate that policy or to game it to minimize its impact.
  4. The really “stupid stuff” move is the big radical one, with grandiose assumptions, and where you fail to assume rule #3. Your policy change will under-perform, guaranteed.

The 2017 change to the U.S. tax code clearly falls into the “stupid stuff” category in its radical restructuring of the corporate tax system, effectively eliminating taxes for many of the richest companies and individuals in the country, with the assumption that this will magically goose the economy and raise more money for the federal budget. Because of game theory and natural responses to these changes. neither of these “magical thinking” events will happen, and it looks like the U.S. will experience trillion-dollar deficits for the foreseeable future.

I have written several times in this blog about my objections to the current corporate tax system. In short, it is the variance of actual tax rates paid that messes up the system and puts an unfair burden on the less-well-connected businesses who pay the highest rates. If special-interest tax preferences (affecting, say, less than one in 1000 corporate taxpayers) were eliminated, the top rate could have been incrementally reduced for “normal businesses” who are at the heart of the economy, without veering the economy into unknown territory.

Instead, this legislation added more special-interest tax preferences and just mashed the rate table down radically. Then, violating my “income is income” principle, they created complex new income pass-through rules that both give new job security for tax lawyers and basically eliminate taxes for more corporations. Subsequent evidence shows that (1) employees will see only small, one-time benefits, (2) corporations are mostly passing the tax savings directly back to owners rather than re-investing in the economy, and (3) a large percentage of the benefits are going to non-U.S. owners.

The result: massive new deficits as far as the eye can see. Steven Rattner put together a great graphic recently showing the effects of the 2017 tax legislation and the 2018 budget on the deficit. It is ugly, to say the least.

Budget deficits

In short, you have been had. We have just further widened income inequality, harmed our ability to help the broader citizenry through responsible government spending, and burdened future generations of Americans with massive new debt.

Perhaps it can be undone in the next Congress. Perhaps not. My suggestions:

  1. Put every rule, form, deduction, credit or other tax preference that affects less than one in 1000 taxpayers on a list for sunset, to be resurrected only through a bi-partisan commission re-assessing fairness. Most of these were created in the dark of night, written by the cash-bearing lobbyists themselves.
  2. Move to the principle that “income is income” regardless of its source, and should be treated equally.
  3. Make corporations decide if they are really separate “legal persons” from their owners. If they are, then tax them as such.
  4. Use a very progressive tax rate table to compensate for the natural regressive effects of other taxes on low-income businesses and people, such as sales and FICA taxes.

This is not “liberal” stuff, by the way. I cannot see careening the economy into a massive deficit hole based on bad economic theory, which your Congress just did, as “conservative” in any way.


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