Editor’s Note: Jeffrey Sachs is a professor and director of the Center for Sustainable Development at Columbia University. The opinions expressed in this commentary are his.
In letter to GOP senators, Jeffrey Sachs writes that US is at defining moment
The tax cuts just voted by the House could put our country into a tailspin
Dear Sens. Susan Collins, Bob Corker, Jeff Flake, Ron Johnson, John McCain and Lisa Murkowski:
I fear for the future of our country. I know that you do as well. You are patriots first and partisans a distant second.
We are at a defining moment in our history: The tax cuts just passed by the House and the last-minute changes to health care proposed by the Senate leadership could put our country into a tailspin.
Congress members and pundits tell us that Republicans need to pass tax cuts to appease their party’s mega-donors. Senators, patriots need to protect the future for our children and grandchildren.
Years ago, we could rely on the mainstream of the Republican Party to protect the budget from short-term populism. A few Republican supply-side zealots believed that tax cuts could pay for themselves. Many Democrats, far too enamored of Keynesian solutions, have argued that deficits don’t really matter. I strongly disagree. Though I am a Democrat, I sided with Republicans opposing President Barack Obama’s stimulus legislation in 2009 because I believed it would burst the budget.
I also opposed the bipartisan deal in 2012 to make permanent most of the Bush-era “temporary” tax cuts, for the same reason. My Democratic friends took exception with me both times. I told them that the country’s future comes before the party.
Sadly, the ratio of debt to gross domestic product has roughly doubled since the end of fiscal 2008, from around 39% to 77%. A remarkable 39% of the federal debt at the end of fiscal year 2016 was in foreign ownership. The non-partisan Congressional Budget Office (CBO) has demonstrated that our fiscal trajectory remains unsustainable even before the newly proposed tax cuts. It says we will likely reach a debt-to-GDP ratio of 89% by 2027 and 150% by 2047.
This CBO projection is actually too optimistic. It assumes modest interest rates for decades and no major new outlays for the military or for coping with climate change, and no meaningful increases in federal spending on science, technology, education, labor, infrastructure, low-income families, children in poverty and other pressing needs. It assumes no major stumbles in the economy, such as occurred in 2008.
By some estimates, the long-run “fiscal gap” between outlays and taxes, measuring both in net present value, is now more than $100 trillion. That is more than five times today’s national income.
The implication is that taxes as a share of GDP will have to rise by several percentage points, or government outlays as a share of GDP will have to be cut sharply, a point emphasized repeatedly by the CBO, the Comptroller General of the United States, and independent experts. Serious nonpartisan analysts have documented these realities for years. These challenges will become crippling in the future if we now choose to run headlong in the opposite direction by boosting the deficits still further with reckless, unaffordable, unfair and unnecessary tax cuts.
Perhaps taxpayers have come to believe that the public debt and unfunded liabilities not yet on the books do not matter. Too many politicians of both parties have pretended as much over the years. Yet debts must be paid and unfunded net liabilities must be closed.
Let me correct a basic mistake fueled by the daily drumbeat for tax cuts. According to the Joint Tax Committee’s estimate of the House tax bill, federal revenues would fall by around $240 billion in 2019. Households with incomes above $500,000, roughly the top 1%, would have tax cuts of around $58 billion, or a whopping 24% of the total tax cuts (an average $34,000 per rich taxpayer). Households with incomes below $50,000, roughly the bottom half of households, would see their taxes reduced by a mere $14 billion, or just 5.9% of the tax cuts (an average of $160 per taxpayer).
This may make it seem that poor taxpayers will gain slightly while rich taxpayers would obviously gain a lot. In fact, the poor and working class will almost surely end up far worse off than now. When steps are taken to close the deficit, programs like Medicare will face the ax, or payroll taxes will rise. The bottom half will end up paying much more than they gain in the meager tax cuts allocated to them.
This is just basic fiscal arithmetic: If you make massive transfers to the rich, the rest of society will pick up the bill.
As you know well, senators, most economic models show large and persistent budget deficits as a result of the House proposals.Even if there is some modest economic growth down the road, the tax losses will come up front while any growth effects will come later. In fact, we should not expect much, if any, added growth. Some sectors might benefit slightly (manufacturing) while others (commercial and residential buildings) are likely to be hit.
Even the Senate legislation would make many of the incentive provisions temporary, raising uncertainty and limiting or eliminating any incentive effect from the very start. The only sure effect would be the enormous tax saving of the rich and the enormous rise in the budget deficit.
Even worse, our competitors are likely to match the US corporate tax cuts in a global race to the bottom. All countries will end up losing tax revenues with no net gains in growth.
What’s more, the much ballyhooed gains for manufacturing are likely to be small. While the statutory tax rate would indeed decline from 35% to 20%, the marginal effective tax rate that determines the economic incentive to invest would decline by much less.
The current tax code already includes many provisions such as accelerated (or “bonus”) depreciation that lower the marginal effective tax rate compared with the statutory tax rate. The Congressional Research Service has shown that the marginal effective tax rate of the US federal corporate tax is already roughly comparable to that of America’s major competitors.
Rather than slashing the statutory tax rate, the best tax policy to spur new business investments would be to expand the provisions for accelerated depreciation and expensing.
The high statutory rate would continue to collect federal revenues on pre-existing investments and on monopoly profits; the accelerated depreciation and expensing would lower the marginal effective tax rate on new investments.
Yet such a preferred policy would also have to be made up by raising tax revenues elsewhere, both to pay for the accelerated depreciation and to move towards closing the long-term fiscal gap.
Real tax reform would also include an end to the abusive transfers of intellectual property to overseas tax havens by America’s largest companies, such as Apple, Amazon, Alphabet (Google), Facebook, and Microsoft; an end to the carried interest loophole by wealthy CEOs of hedge funds and private equity funds; an expansion of the Earned Income Tax Credit for low-wage workers; and a tax on carbon emissions so that fossil fuels pay their true social cost. None of these are in the House tax cut.
Real tax reform certainly would not repeal the estate tax paid by the mega-rich, a clear and ruthless wealth grab by the President and his Cabinet of billionaires.
Real tax reform would not make incentive effects temporary, such as the Senate proposal to eliminate expensing of investments after five years. The phase-out of key incentives exposes the hypocrisy of the tax-cut effort. If the real goal is to improve incentives, then do so, but pay for them honestly. To propose eliminating incentives within a few years makes clear that the real aim is to transfer trillions of dollars to the richest Americans.
Americans want a government of the people, by the people, and for the people, as expressed by the great Republican President, Abraham Lincoln. They do not want a government of the ultra-rich, by the ultra-rich, and for the ultra-rich. Americans want to be able to compete in world markets without the government suffocated by debt. Please protect our nation from fiscal disaster at the hands of a few greedy donors to the Republican Party.
Jeffrey D. Sachs, university professor, Columbia University