The signing into law of the “Tax Cuts and Jobs Act” of 2017 has become the Trump administration’s most successful achievement to date.
Passed in both the House and Senate along partisan lines, the law is meant to see a decrease in the personal and corporate tax brackets. But whether this will have a positive or negative effect on the nation will be determined in the years to come.
But is there a “tell-tale” sign of the efficiency of the tax cuts?
In short: Yes. But it is not quite as obvious as either the Republicans or Democrats have suggested. The Democrats worry that the tax cuts will increase the national debt and widen the deficit by $1 trillion. The Republicans counter with the argument that “a tax cut is a tax cut no matter how small”. But, as was addressed in a previous post, the national debt and deficit only come from Federal spending in excess of revenue. If we want to see a decrease in the debt and deficit, a decrease in discretionary expenditures makes sense.
The political and fiscal benefit of increasing the debt and deficit is a strategy known as “starving the beast.” The idea is that as the debt rises, Congress will be forced to decrease spending, as was done under Presidents Coolidge and Reagan. But as Congressional power shifts from one party to the next, “the beast” tends to find ways to feed itself while its food supply steadily runs out.
This, ladies and gentlemen, is what we call “Inflation.”
Inflation is “a general increase in prices in an economy and consequent fall in the purchasing value of money.” The idea is that the government prints more and more dollar bills, which flood into the market as a way to increase the demand for goods and services; and as the demand rises so too do the prices on those goods and services.
So how does this relate to tax cuts?
Simply put: inflation IS a tax. It’s a tax because when more people spend more money because the value of the dollar is so low, then the government generates more revenue from the taxes on sales, incomes, corporations, imports, exports, etc. Inflation is able to use direct tax cuts with the progressive tax because as people make more money, they will move into higher tax brackets. This is what the American economist (and Nobel Laureate) Milton Friedman referred to as “taxation without representation.” So, much like water finding its level, when taxes are cut and inflation is increased, the Federal government is no longer obliged to starve the beast. So to the Republican point: a tax-cut IS a tax-cut so long as the value of the dollar stays high.
It’s a tax so refined and subtle that most Americans have no clue it’s a tax at all. President Franklin Delano Roosevelt once stated that “inflation is itself a most inequitable type of taxation.” (Though his goal was to use the Keynesian economic model to alleviate the effect of the Great Depression by increasing Federal spending, not lowering it.)
At present, the inflationary rate sits at 2.2%, which conservative economists would say is 2.2% higher than the ideal rate. But the closer to 0 the rate drops, the greater the value of the dollar remains and the truer the tax cut is. So how do we keep it down?
There is no simple answer to the problem of inflation. A good start might be to examine Friedman’s theory on “Monetarism” which is a way to monitor the printing of money that allows for old and damaged currency to be taken out of circulation and replaced dollar for dollar. Of course, this leads not only to a whole new government bureaucracy but the dismantling of the Federal Reserve and a reform of the Internal Revenue Service.
But until a solution is discovered, it would behoove the people of America to keep a watchful eye on the inflation rate to determine whether or not they’ve received a tax cut at all. And if not, if the rate rises in the coming years, then we will know that no matter how taxes are presented, and no matter the rhetoric of the day, the beast is well fed and growing.