Democrats' Next Tax Victory Is Worth the Wait
While Republicans have struggled to pass major legislation this year, the margins with which their tax cut bill passed the House should convince people that some form of this legislation will become law. The Senate is still wrestling with details, but a signature corporate tax cut "paid for" by eliminating deductions of state and local taxes and other goodies favored by the upper-middle class seems to be where we're headed.
The wealthy, who stand to benefit from the most from the corporate tax cut, are the big winners in this framework. But a look ahead at economic, demographic and political trends hints that ultimately, when tax reform comes up again in the next decade, the wealthy could lose all of their gains from this bill and then some.
The place to start is by looking at the current state of the federal budget deficit. At around 3.5 percent of gross domestic product, it's in the range of normal that it's been for the past few decades. But at the current low level of unemployment, the government ought to have no deficit at all. The last time the unemployment rate was as low as it is now, in 1999 and 2000, we had a federal budget surplus.
Deficits tend to shrink when the economy grows, as tax receipts rise faster than outlays. And vice versa in recessions. With the labor market around full employment, it's likely that this is about as good as it’s going to get for the deficit in this cycle.
There are unavoidable and avoidable reasons that deficits have widened since the turn of the century.
In the unavoidable category is the aging of the population. In the late 1990s, the baby boomer generation was in its high-earning mid-life years, and there were relatively few retirees. Now that large generation is entering retirement, and the ratio of retirees to workers is rising. This puts a greater burden on government finances, especially as health-care costs continue to grow.
In the avoidable category are policy decisions made during the 2000s. The Bush tax cuts and debt burdens from wars in Iraq and Afghanistan are large contributors to today's structural deficit. The legacy of the economic downturn and its impact on growth in the ensuing years is another contributor.
The path over the next decade leads to much wider structural budget deficits than America has ever seen before. The $1.5 trillion deficit expansion put forward by this tax bill could add a half percentage point of GDP to the deficit. The continued aging of the population and growth in entitlement spending could add another couple of points. At some point the two parties may decide to get serious about an infrastructure bill, and that could be another $1 trillion in spending. A recession might increase the deficit by another 3 or 4 percentage of points of GDP for a time. And there's always the possibility of increased military engagement and spending. We could be looking at structural deficits of 6 or 7 percentage points of GDP with temporary deficits in the double digits.
And that doesn't address the politics. Once Americans were fed up with President George W. Bush, they put Democrats and President Barack Obama in charge. After Obama's administration, they've put President Donald Trump and the Republicans in charge. Given current polling and the results we've seen so far in special elections and the elections in Virginia and New Jersey, we should expect that over the next several years Democrats will be swept back to power.
The nature of that Democratic coalition is likely to be different from past Democratic waves. In 2016, Republicans did worst relative to 2012 in wealthy, well-educated suburbs that were generally more favorable to Mitt Romney. The strong showing of Democrats in the 2017 Virginia elections were in these same places in northern Virginia. The structure of this tax bill is worst for wealthy, Republican-held districts in blue states like New York, New Jersey and California. These are the types of upper-middle class Republicans who typically have supported fiscal conservatism and lower taxes, since they personally benefited from such policies. This new version of the Republican Party has less to offer them fiscally.
When tax reform comes up again in the next decade, which it most likely will because some of the proposed tax cuts for individuals are set to phase out after 10 years, it'll likely be with a Democratic majority in charge. This majority will be led by women, people of color, and wealthy, well-educated suburban voters. And given demographic trends on the Republican side, that Republican minority will probably be centered increasingly in rural, poorer districts. Without old-guard Republicans like Paul Ryan and Mitch McConnell around to protect their interests, the ultra-wealthy may find themselves isolated at a time when Congress is looking to plug a big hole in the deficit.
It may be cold comfort for those who find themselves with higher tax burdens over the next several years, but for those concerned about the long-term direction of policy, it appears that the wealthy will get their turn to pay -- in the not-so-distant future.
To contact the editor responsible for this story:
Philip Gray at email@example.com