How To Talk About Tax Cuts

As Congress hammers out a budget, the press is carping about the “cost” of tax cuts. Renewing the Trump tax law “would cost roughly $4 trillion over the next 10 years,” the Times laments. Politico questions Speaker Johnson’s embrace of “an accounting method” that makes “tax cut extensions appear to cost nothing.” We’re a newspaper, not a tax preparer. Yet such reports seem to have it backwards. Citizens bear the “cost” of taxes — not Uncle Sam. Viewed through that lens, it costs the government nothing to lower tax rates. It’s even questionable, per the Laffer Curve, whether lower tax rates always lead to less incoming revenue. Past experience has shown that lowering the rates of taxation can help spur economic activity that in turn increases Uncle Sam’s take when all is said and done. This outlook is expounded in The New York Sun’s “Reporter’s Handbook And Manual of Style.”The Style Manual explains that “Reductions in local, state, or federal taxes or tax rates shouldn’t be reported to ‘cost’ money,” because “the money in question belongs to the taxpayers to begin with.” Reducing tax rates, the Sun’s Style Manual adds, sometimes “produces greater revenues as more persons flood into the work force.” That reflects the logic of the famous bell-shaped curve drawn by economist Arthur Laffer. Mr. Laffer’s diagram — an icon of supply side economics — depicts “tax rates on the x axis and tax receipts on the y axis,” the Style Manual explains, and the resulting curve shows that a 100 percent income tax rate and a 0 percent rate both lead to $0 in revenues. The logic of the Laffer Curve was vindicated in the 1920s, when Coolidge’s tax cuts led to higher revenues, and in the 1960s, when JFK similarly called for tax cuts to get the economy moving.Kennedy in 1962 proposed “an across-the-board, top-to-bottom cut in personal and corporate income taxes.” The federal tax system “exerts too heavy a drag on growth in peace time,” he said. The high tax regime “siphons out of the private economy too large a share of personal and business purchasing power,” and, most importantly, “it reduces the financial incentives for personal effort, investment, and risk-taking.” Then, too, critics fretted about the potential cost.JFK would hear nothing of it, averring that “a rising tide lifts all boats” and so cutting taxes would lead to broad economic growth. It wasn’t until 1964, though, after Kennedy’s assassination, that Congress passed the cuts. Wouldn’t you know it, by next year, the deficit was lower. Reagan’s tax cuts, too, spurred a wave of growth — even if Congress failed to rise to the occasion by enacting the spending cuts needed to avoid budget deficits in the 1980s.The Trump tax cuts of 2017 were a signal achievement of the president’s first term, spurring growth with low inflation until the pandemic struck. Failure to extend the cuts would hamstring Mr. Trump’s agenda of economic renewal. So it’s a no-brainer for the GOP Congress to act to prevent the tax rates from going back up. Many Republicans seem to grasp that it would be shortsighted to let the tax cuts expire over concerns about their purported “cost.”To be sure, not everyone in the GOP is on board. The House Ways and Means chairman, Congressman Jason Smith, has a “huge concern” about how to account for the tax cuts in the budget pact. Using a “current policy baseline” would reflect the current, lower, tax rates for revenue projections. If the GOP doesn’t follow this baseline, budget rules require that they impose “corresponding spending reductions” in line with the amount of the tax cuts. Mr. Smith frets that the “current policy baseline” could run afoul of the Senate parliamentarian who, per Politico, “will referee such issues under the budget reconciliation process.” Larry Kudlow is among those advocating moving ahead with the baseline — and making the tax cuts permanent, to boot. That reflects the wisdom of Coolidge, Kennedy, and Reagan — and the fact that letting Trump’s tax cuts expire would have a devastating economic cost.

How To Talk About Tax Cuts

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