By Chris Campion
The GOP has recently been working on tax reform, and both the House and Senate have versions of tax reform that are currently being hashed out in conference between the two houses. Aside from the caterwauling on the left side of the House and predictions of our moon exploding and destroying all life on the planet because taxes might be cut, reform of one kind or another is inevitable. Why?
Because it’s not really the revenue side of the equation that’s the bulk of the problem. It’s the spending.
Why does spending go through the roof, annually? Because the government can. Because politicians are rarely penalized for spending money. They’re typically rewarded for it, by being re-elected.
They’re rewarded because they brought some of that federal pork back to their home states, and not coincidentally, their names are often found on the outsides of buildings that other people paid for. Some states are even proud of their Congressional representatives “bringing home the bacon” for them, as if there’s just a pile of magical money in D.C. and the job of senators and representatives is to back U-Hauls up to the pile and shovel as much in as they can (or pay their staffs to shovel), then call it a day.
The result of all this shoveling is $20 trillion in debt. That’s a $170,000 debt burden for every taxpayer – not every American, mind you, but just those who actually pay net income taxes. As the debt has doubled in the last eight years, and the annual federal government’s spending has followed that same doubling, what’s happened to economic activity? Based on the hysteria of the left over tax reform, our very lives depend on government spending, because apparently all economic activity will come to a halt if we spend one less dollar next year.
But the reality of the economy is much different from those idiotic rants. In fact, if you take a look at the data, the opposite is true. As federal spending goes up, the M2 velocity of money goes down.
What’s the velocity of money? Let’s let Fred tell you. He’s got all the answers here: “The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”
If you take a look at federal debt alongside the same M2 indicator, the idea that federal spending is what keeps the economy going (according to permanently-ensconced chowderheads like Nancy Pelosi), goes “poof.” It’s an idiotic assumption, that all federal spending is a net positive, and to even challenge that piece of it is something that’s off the left’s table.
So as spending and debt go up, economic activity goes down. This is apparently news to Democrats in Congress.
But that’s the crux of the argument. You can’t have tax cuts, because we’ll be able to spend less, even though spending goes up, annually, regardless of tax revenues. The gap between spending and tax revenues is a permanent one, and any change to the status quo is Armageddon.
As the tax bill currently stands, the corporate tax rate reduction to 20 percent would put the United States on a much more level playing field with other countries, even if the effective rate is always lower than the official rate (which is another argument to strip down the tax code and carve-outs, but that’s a longer conversation). If you’re looking to free up capital that companies would use to expand and invest, that’s a very quick way to do it. At the very least, it would bring our rate nearer to the average of the G20 countries, which improves the ability to compete:
While the tax reform bills are a small step forward, the really tough work is on the other side of the table, and not the ideological one. The toughest challenge will be spending, and reducing it, so the debt above doesn’t crowd out all other economic activity, and dampen growth. Since debt is now over 100 percent of GDP (below), and the economy, while growing, is growing at historically low levels, especially coming out of recession, one is left wondering if Congress has the ability to stop this descent into madness. They don’t seem to be willing to even slow it down.
It’s an abdication of responsibility. Considering the incumbency rate, we are going to continue to let them fail, and not hold them accountable. Then it becomes our fault, not theirs.
Chris Campion is a business analyst who worked for decades in leading organizations in Vermont. Reprinted with permission from the Ethan Allen Institute Blog.