The truth about Trump's tax cuts

Story highlights

  • Jeffrey Sachs says Trump is following the GOP playbook in promising tax cuts
  • Sachs: The reality is they will largely go to the rich and do little to improve the economy

Jeffrey Sachs is university professor and director of the Center for Sustainable Development at Columbia University. The opinions expressed in this commentary are his.

(CNN)Give the Republicans their due: They are persistent. Since Ronald Reagan became president in January 1981, the Republican Party has focused relentlessly on tax cuts. And Donald Trump is no exception -- he told the crowd at his Phoenix rally Tuesday, "We're giving you the biggest tax cut in the history of our country."

The truth is: Republican tax cuts go largely to the rich, and the new Republican proposals this fall will be typical in this regard.
    When asked how to pay for such tax cuts, the Republican answer is unswerving. First, the tax cuts will pay for themselves through higher growth. Second, if they don't, then cut social spending. And third, if neither growth nor spending cuts save the day, higher budget deficits will be acceptable.
    Such claims have been proved wrong time and again: Tax cuts don't pay for themselves; the public justifiably resists cuts in social services; and the high deficits that result weaken the country and put a burden on the young, who will eventually service the public debt. Both Reagan's tax cuts in 1981 and George W. Bush's tax cuts in 2001 failed to pay for themselves and led to many long years of fiscal austerity to get large budget deficits under control.

    The wrong time

    The Republicans are at it again, pushing for another round of personal and corporate tax cuts at a hugely inopportune time. Once again, the Republicans in Congress claim that tax cuts will raise growth, boost wages, help the poor, unleash productivity and ultimately pay for themselves. Yet this time around the starting point for tax cuts is far worse than in 1981 or 2001.
    First, there is no "business cycle" or "stimulus" argument for another round of tax cuts since the unemployment rate is already cyclically low, at around 4.3%.
    Second, the current budget trajectory is already one of large and growing deficits, projected by the Congressional Budget Office to average around 4% of gross domestic product during the coming decade. There are simply no more federal revenues to lose.
    Third, the rich are already doing very well and don't need any extra fiscal advantages, while the poor and working class are struggling and depend more than ever on the health care, social services and public investments financed by federal revenues. When candidate Trump's tax-cut plans were scrutinized, the super-rich were found to be the huge beneficiaries.
    Rather than giving up federal revenues in yet another round of tax cuts, we actually need higher revenues as a share of GDP. The first aim of budget policy should be to reduce the chronic deficits to begin to reduce the ratio of public debt to GDP, through a combination of cost-saving and sensible tax increases aimed at closing loopholes and taxing harms to the economy (such as carbon emissions).
    The second aim should be to help those in the bottom half of the income distribution, both the poor and working class, who are hurting badly with stagnant earnings and insecure working conditions.
    The third aim should be to finance the modernization of infrastructure, including the shift of US energy toward low-carbon sources including wind, solar, hydroelectric power and nuclear energy, rather than coal, oil and gas. Tax cuts this year would make it very difficult, if not impossible, to achieve any of these three vital goals.

    The rich don't need a cut

    There is indeed no case whatsoever for reducing the personal income tax rates on high-income Americans. The richest Americans are already enjoying an era of unprecedented wealth and prosperity. Their tax revenues and more are needed to fund the federal government.
    There is a glimmer of a case for a modest reduction in the US corporate tax rate -- to bring it in line with other large economies -- but only as part of a package that increases overall revenues, protects the poor, finances improvements in our infrastructure and reduces the budget deficit. The case is a modest one and would make sense only as part of a larger bipartisan fiscal agreement. Yet no such balanced package is remotely on offer. The simple fact is that the billionaires who steer the Republican Party, including the Koch Brothers, Robert Mercer, Sheldon Adelson, and of course Donald Trump, are not thinking about the country's needs, but only about their own insatiable greed.
    The Republicans' argument for corporate tax cuts that we hear most these days is that corporate tax cuts will boost wages by bringing investments back to the United States. This claim is wildly exaggerated for two main reasons.
    The first is that a cut in the corporate tax rate would give corporate shareholders a huge tax break on earnings from investments made long ago. The beneficiaries of such a tax cut would be the richest Americans, and without any boost to wages from such pre-existing investments.
    Second, even if new corporate investments are spurred, those new investments are as likely to be labor saving as labor using. We could easily end up with modestly higher overall investment spending but with fewer jobs at lower wages as a result.
    Increased investments in robots and artificial intelligence systems spurred by the corporate tax cuts could lead to layoffs and lower wages as new robots replace existing workers. And any overall benefits for economic growth are likely to be modest. As the United States cuts its tax rate, other countries will as well, in a new global race to the bottom in corporate tax collections.

    Better ways to help workers

    If the real goal is to help wages and workers, there are far better policies than a corporate tax cut. The earned income tax credit should certainly be expanded for low-income workers. Workers should be helped to meet their health care and education costs, the opposite of the Republican offer. And tax revenues that would be lost to a corporate tax cut would be much better used to fund the promised investment in infrastructure, which would not only modernize the economy but also provide construction jobs along the way.
    The truth is that the United States needs a bipartisan budget deal, involving higher not lower overall tax revenues as a share of GDP, to cut the budget deficit, finance needed social services and expand infrastructure investments. Part of the overall budget package could include a modest cut in the US corporate tax rate with the lost corporate revenues more than made up for by tax increases elsewhere.
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    My own guess is that the push for tax cuts this fall will fail to produce a political agreement, just as with health care. Trump is too unstable a leader to broker a complex political deal.
    The simplistic version being developed by the Republican congressional leadership and White House is likely to be so unrealistic and lopsided for the rich that it is will produce a massive political backlash. Successful tax policy for the country's long-term needs will require a return to serious governance in a post-Trump era.