Worry about the Republicans’ tax bill—and how it was passed

SOME political theorists argue that the law draws legitimacy not just from voting, but also from public debate before legislation is passed. In voting through a tax-reform bill on December 2nd, Republicans in Congress have tested this principle to destruction. The bill, like most, has its strengths and its weaknesses, but Republicans have rushed it through disregarding the value of consistency and evidence. Their success will weigh on the quality of American government.

The Senate’s bill is broadly similar to one that passed in the House of Representatives in November. It would slash the corporate tax rate from 35% to 20% (albeit a year later than the House bill). Taxes for unincorporated businesses and individuals would fall substantially. The personal exemption, which reduces a household’s taxable income in accordance with its size, would be replaced with a much higher standard deduction, the flat amount that can be earned tax-free. The child tax credit would also rise. To raise money, the bill curbs some deductions, such as those for debt interest and state levies.

Lawmakers reconciling the bills confront three main differences. First, the Senate proposal leaves the deduction for mortgage interest mostly intact; the House wisely wants to curb it. Second, whereas the House would abolish the estate (inheritance) tax entirely, the Senate would keep it. It is right to do so, though it would double the threshold at which the tax kicks in, from $22.4m (for couples). Third, the Senate has tacked on a repeal of Obamacare’s individual mandate, a fine for Americans who do not buy health insurance even if they can afford it.

One test of the final bill is its effect on the economy. On the one hand it would limit deductions in favour of cuts to marginal tax rates—a worthwhile reform. On the other it will increase inequality, largely because business-owners tend to be rich, and it will add a trillion dollars in public borrowing by 2027, according to an official projection for the Senate’s bill.

But there is another test, which is the effect on governance. The Republicans have argued that their bill is aimed at helping middle-class Americans and that it will spark enough economic growth to pay for itself. This is belied by experience—witness the rise in deficits after the tax cuts of 1981 and the early 2000s (see article). Not even economists in sympathetic think-tanks believe that the Republican claims will be borne out. Steve Mnuchin, the treasury secretary, has failed to produce any analysis justifying his predictions of much higher growth (his department’s inspector-general is investigating why not). The Treasury did, however, delete a study from its website that was unhelpful to the administration’s argument.

All politicians exaggerate the benefits of their policies, and some Republicans have made unconvincing claims about the rewards of tax cuts for decades. However, in the 1980s the party undertook a robust debate over the merits of supply-side economics, and in the 2000s George W. Bush’s own economists cautioned against over-rosy growth forecasts. This time, most Republican senators simply brushed off the official projection that the bill’s effects would contradict their sunny promises. In addition, they attacked the independent forecasters whom they have previously championed as a valuable restraint on self-serving politicians. And to minimise scrutiny, they rushed the bill through barely a day after the forecast was released. Perhaps, after the failure of health-care reform, they were desperate for a significant legislative achievement.

A lack of consistency makes Republicans seem unprincipled. They have spent the past decade claiming that the national debt is among their main concerns. In 2009 they opposed President Barack Obama’s fiscal stimulus, arguing that it was unaffordable. Yet it cost less than today’s tax bill would. It passed when unemployment was over 8% and interest rates were stuck near zero. Today unemployment is 4.1% and rates have started rising because the Federal Reserve is worried about inflation. The Fed will probably raise rates faster after the tax bill, limiting the boost to economic growth.

The whiff of self-enrichment does not help. President Donald Trump assures Americans that the bill will be “not good” for his bank balance. Without seeing his tax returns, that is impossible to know. But he holds interests in around 500 “pass-through” businesses, which are among the main beneficiaries of the tax bill. As a property developer, he is almost uniquely fortunate in being allowed to keep most of his tax exemptions.
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