3-Myths About Tax Cuts


(…) While Republican’s rush to promote the “tax bill” as the biggest tax cut for Americans ever, they also have to find ways to offset the initial reduction in tax collections so as to NOT expand the deficit by more than the estimated $1.5 Trillion dollars.

– Lance Roberts

By doing so Senate republicans can pass tax reform with only a 51-vote majority through the “reconciliation” process, otherwise it would require 60-votes which would be impossible for the current Senate to obtain.

Therefore, in order to “score” the bill to fit within that $1.5 trillion window, Republicans, are relying on several “myths” about how tax cuts will “pay for themselves” in the future as:

  1. Tax cuts will lead to stronger economic growth
  2. Tax cuts will increase wages for American workers
  3. Tax cuts will reduce Federal debt and deficit levels.

Let’s look at each one.

The Myths Of Tax Cuts

Myth #1: Tax Cuts Will Create An Economic Revival

As the Committee for a Responsible Federal Budget stated last week:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.”

That is absolutely correct and as I pointed out on Friday:

“As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.”

Myth #2: Tax Cuts Will Lead To A Rise In Wages

The same is true for the myth that tax cuts lead to higher wages. Again, as with economic growth, there is no evidence that cutting taxes increases wage growth for average Americans.

In fact, as I discussed previously:

“An expansion that began, believe it or not, more than seven years ago has extended a longer-run trend of wage stagnation for the average US worker, despite a sharp drop in the official unemployment rate to 4.4% from an October 2009 peak of 10%.

After adjusting for inflation, wages are just 10% higher in 2017 than they were in 1973, amounting to real annual wage growth of just below 0.2% a year, the report says. That’s basically nothing, as the chart below indicates.”

Furthermore, the idea that companies will begin to increase employment is likely overestimated as well. With the long-run trend of employment growth declining, not to mention we are very late in the current economic cycle, tax cuts are unlikely to sharply increase employment rates.

This is particularly the case currently as companies are sourcing every accounting gimmick, share repurchase or productivity increasing enhancement possible to increase profit growth. While asset prices have surged higher, the underlying fundamental growth story remains weak. 


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