Editor’s note: This op-ed is by John Fairbanks, a Vermonter currently living and working in Washington, D.C.
Some of you might recall that, a little over two years ago, I published in these pages a commentary called, “The $4,000 Promise.”
I wrote that piece shortly after Congress had approved a budget resolution through a parliamentary maneuver that allowed a $1.5 trillion increase in the deficit over 10 years, which made room for an enormous tax cut. Back then, I observed:
“Tax cuts are being sold as ‘rocket fuel for the economy,’ and backers state, as usual, that the cuts will pay for themselves by sparking economic growth. As a sweetener — and to try to combat the fact that about 80 percent of the proposed tax cuts go to the 1 percent — they’re claiming the plan’s central component, a corporate tax cut from the current 35 percent to 20 percent, ‘would likely give the typical American household around a $4,000 pay raise.’”
Well, as usual, enthusiastic claims are made for tax cuts have a way of not performing as-advertised.
First, with respect to the economy, growth in 2018 and 2019 has continued at pretty much the same annual rate we’ve seen over the last decade, coming out of the worst economic crisis since the Great Depression. In 2018, the first year following the tax cuts, U.S. GDP grew about 2.9%, matching the figure notched under the previous administration in 2015. One economist called this a “sugar high,” while also noting that we should factor in the impact of deficit spending, which typically provides an economic boost. (The country’s deficit currently lives a little north of $1 trillion.) Right now — and we’ll await final data — it appears GDP growth for 2019 will land at about 2.1%, which was about the average growth rate from 2010 through 2016. So, the economy continues to grow at the relatively steady rate we’ve seen for awhile, now.
Second, about that $4,000 pay raise …
The Bureau of Labor Statistics reported in early December that “real” average hourly earnings — that is, the money workers saw in their paychecks, adjusted for inflation and the number of hours in the workweek — was up about 1.1% from November 2018 to November 2019, despite a relatively low unemployment rate. At that pace, a $4,000 raise is going to take a very long time to show up.
Now, if you just look at “nominal” wage growth, which is a dollar figure not accounting for inflation and workweek hours, the number looks higher, but that’s really not an accurate reflection of what American workers are seeing in their paychecks, what they’re able to spend or save.
All this gets back to the points I’ve made in the past, and which the data appear to bear out: Tax cuts are not a magic wand; they are not “rocket fuel for the economy;” and whatever benefits they bring cannot, by and large, be expected to accrue in any significant way to the average American.
The economy is much too complex to respond dramatically to a single stimulus.
By extension, this caution should be applied to the argument that raising taxes on the wealthy — which, by the way, I favor in principle — will produce large, beneficial effects on their own. All of this has to be thought of in the context of broader economic and social policy, which itself is the product of our priorities.
I happen to believe that growing income inequality threatens our economic and social security. I think we need a strong system of income supports for the tens of millions of Americans whose earnings do not provide for adequate food, housing, education, and health care. I believe the environment we exploit to drive the economy should be protected and that repairing and replacing essential infrastructure, which we’ve ignored for decades, should be a top priority. Such things require public investment, and the money for that comes from taxes. (We’ve known for a long time that eliminating public investments like that — “starving the beast,” as it’s known — is actually one of the goals driving tax cuts.)
These beliefs, policies, and goals are matters for debate. However, the claim that cutting taxes will produce economic miracles is not. That claim, simply put, does not add up.
Read the story on VTDigger here: John Fairbanks: The $4,000 pipedream.
