After Congress approved the new Republican-sponsored tax reform bill on Dec. 19, President Donald Trump signed it into law on Dec. 22. The Tax Cuts and Jobs Act of 2017 is a mixed bag that will cut taxes for some and increase them for others, and completely ignores the federal government’s chronic overspending.
“Tax cuts are great, but balancing our checkbook is also crucial,” said Libertarian National Committee Chair and Phoenix, Ariz., mayoral candidate Nicholas Sarwark. “This reform package is a mix of the good, the bad, and the ugly.”
Starting with the ugly, tax cuts without corresponding spending cuts are ultimately ineffective. Americans can’t avoid paying the bill that Congress racks up in their name.
“We can pay immediately and directly through taxation,” Sarwark said. “Or we can pay more later through inflation. That’s what happens when the federal government spends more than it takes in and the deficit is primarily funded by newly created money that is loaned to the government by the Federal Reserve — and it amounts to theft in either case. Interest on that debt means we’ll keep paying even more. The vicious cycle continues in today’s budget debates. Republicans want to increase the deficit for defense spending, and Democrats want to increase the deficit for everything else. As a ‘compromise,’ all spending will rise — and so will the debt.”
Another ugly result is that the tax code will quit using the Consumer Price Index to index tax brackets for inflation, and instead use chained CPI. This method understates inflation and will result in a higher, more costly, bracket for many taxpayers.
Along with the ugly, there are even more bad results. One is that when deficit spending is funded by borrowing money from a central bank, this disproportionately benefits people who have assets — the much maligned top 5 percent — and hurts everyone else by devaluing their wages and savings.
“More than 12 percent of the federal government’s $20 trillion–plus debt is owned by the Fed,” Sarwark said. “The Fed bought that debt with newly created money that no one actually had to earn, and they bought it largely from people who are already wealthy. The Fed has been manipulating interest rates down for decades now, and the owners of that debt have received significant capital gains because lower interest rates raise the price of existing Treasury bonds.”
Wealthy Wall Street investors redirected much of their proceeds into the stock market, resulting in the second-longest bull market in history. This has led to the point that 5 percent of the population owns nearly 62 percent of the wealth in the United States. Much of that wealth comes from the appreciation of assets, which is bad news for the 95 percent of the population without enough assets or financial knowledge to play the game. When the government manipulates the money supply this way, it effectively takes from the poor to give to the rich and feeds a class-envy narrative.
“As Libertarians, we have no problem with people getting rich on Main Street by honestly providing products and services people want at mutually agreed upon prices,” Sarwark said. “We also have no problem with people investing their savings in businesses and prospering when those businesses do well. Crony capitalism is a huge problem, though, making some people rich at the expense of everyone else through their political connections rather than their business skills. Crony capitalism allows Wall Street and Washington Beltway insiders to profit from nothing more than their ability to anticipate when the Fed will pump more unearned funny money into the economy.”
Despite all the bad and ugly, some good will come from the new tax reform law. Reducing the corporate tax rate from a nominal 35 percent with lots of loopholes to 21 percent with fewer loopholes will be fairer to all corporations and make U.S. business more competitive in the world economy.
“The dirty little political secret, though, is that no corporation ever has or ever will pay taxes,” Sarwark said. “Corporations merely collect taxes and pass them on to their customers in the form of higher prices, to their shareholders in the form of lower dividends, and to their employees in the form of lower wages. In the end, only people pay taxes.”
Another good result is that corporations will no longer have to pay taxes on foreign operations. For example, before the reform an American company with operations in France would be required to pay U.S. corporate income taxes on top of French taxes. The United States is nearly the only country to impose that kind of extra-territorial tax. It’s ending now, and it will make American corporations much more competitive.
Repealing the Obamacare individual mandate is good but does nothing to cure the systemic flaws of the U.S. health care system, which has been subject to disastrous government intervention for decades.
Finally, the new $10,000 cap on exemptions for local and state income taxes and property taxes will provide an incentive for high-tax states like California, New York, and New Jersey to lower their taxes and bring them more in line with the rest of the country. That would be a good outcome for residents of those states.
“The net takeaway is that, although there are a few good incentives and structural changes, the new tax reform law does nothing to solve the underlying cause of high taxes — sky-high spending,” Sarwark said. “Neither Democrats nor Republicans are willing to address the fundamental drivers of government overspending: Social Security, Medicare, and welfare entitlements. Together, they make up 62 percent of federal spending. Defense and security spending make up another 24 percent. Only Libertarians are willing to address this herd of elephants in the room. In 2018, the Libertarian Party aims to run more than 2,000 candidates with the common sense and courage to tackle our real spending problems and solve them.”