Tax Day: Understanding the Republican Logic Behind Tax Cuts for the Top

Written by Aldo Aragon

As Congress enjoys a two-week recess, Republicans prepare to endeavor upon tax reform once Congress reconvenes. After the healthcare debacle, the White House ensured that the “great negotiator”—as President Trump is affectionately called—would play a larger role in delivering tax reform. Even though Secretary of the Treasury Steven Mnuchin provided an August deadline for tax reform, it is uncertain as to what the legislative road would be for Republican efforts. Gary Cohn, director of Trump’s National Economic Council and Trump’s chief economic advisor, has neglected such a deadline while stating that the Trump wing might deviate from Speaker Paul Ryan’s “A Better Way” blueprint.

It is clear that, for now, the only certainty is uncertainty when it pertains to details for Republican tax reform efforts. Nevertheless, a classic debate exploring the magnitude of the social contract between the American government and constituents will soon emerge. Warring ideologies have been at the core of American political discourse since the dawn of the New Deal era when Franklin D. Roosevelt revamped the social contract for financially devastated Americans.

Republicans seek to cut taxes, particularly for the wealthy, with the purpose of limiting government and catalyzing economic growth. Supply-side economics, or “trickle-down economics” as it is called by many critics, lies at the heart of post-Reagan Republican tax reform. The basic idea is that cutting taxes generates an economic stimulus, with tax cuts for the wealthy providing an added boost by concentrating more money among the individuals and businesses with the power to generate economic expansion, specifically employment.

It makes sense—if we allow the wealthy to keep more money then they will surely invest in the economy. Undoubtedly, this pitch will be made at some point in the coming months. Just now, it isn’t true. At least, it hasn’t been for the last few decades. It is obvious that entrepreneurship and investment drive economic growth. Solid business ideas result in jobs, (unless a robot can do them, of course). The problem is that the U.S. economy has become less entrepreneurial since 1978. Economists can determine this by looking at business dynamism, which is the process by which firms continually emerge, fail, expand, and contract while taking into account as some jobs creation, destruction, and turnover. A Brookings study finds that business dynamism has been in decline since 1978.

This picture has formed—alongside the increasing gap between rich and poor. Providing tax cuts for the rich and for corporations that complain about the 35 percent corporate tax rate—even though the effective tax rate is around 22.7 percent—will not help close that gap. The real issue revolves around the eroding prospects for social mobility. The fraction of children earning more than their parents has decreased from 90 percent in the 1940s to 50 percent today.

Republicans are bound to distort the landscape of diminishing social mobility, painting it as an ill brought about by government regulation and the overpowering welfare state. Real progress begins when we recognize the the 21st century social contract demands that government provide a platform for those seeking to escape perpetual poverty. Economic growth enjoyed by all begins with middle-class individuals that can drive personal consumption, which constitutes 70 percent of G.D.P. Tax cuts for the rich and a neglect of the middle class will only exacerbate the decline of social mobility.