President Trump and his Republican allies in Congress are close to pushing a tax reform package that would be the legislative victory that his presidency has been seeking. Critics of his tax proposal say it favors the rich at the expense of the poor and middle class, and supporters say it will provide an economic stimulus that would benefit everyone. Obviously, cutting taxes will mean less revenue for the government, which is already operating at a deficit. Few will argue that this will lead to higher deficits and higher interest rates in the short run. However, supporters of tax cuts believe that cutting taxes will stimulate more than enough growth to offset the reduction in tax rates. This sounds good, but it has never been proven in practice. Tax cuts during the Reagan and George W. Bush administrations resulted in the sharpest increases in the deficit in the post-depression era. Even staunch conservative pundits like Ben Stein agree that sharp tax cuts would be damaging to our economy.
There is no question that our tax code is far too complicated, which always favors people who can afford fancy CPAs and tax attorneys. I also agree that our corporate tax rates are too high and suppress job growth. My hope is that once the President’s tax proposal gets to the Senate, bipartisan negotiations will result in a simplified tax code and lower corporate rates, but personal rates should not change much. Otherwise, if the President’s tax package as it stands becomes law – expect a sharp spike in our deficit, double-digit interest rates, and a deep and painful recession. We’ve seen this movie before.