It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste

It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste

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The Republicans suffered a humiliating defeat on their proposal to cut taxes for the wealthy disguised as healthcare reform. But as the Trump administration has made clear, they are not about to give up on their tax cut plans.

But how will those tax cuts be financed? The Republican’s health care reform plan would have delivered $600 billion in tax cuts, but with that option gone where will the money come from?

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Republicans would like you to believe that tax cuts can be financed by reducing government waste, cutting foreign aid, and so on, or from the miraculous economic growth tax cuts bring about. The reality is that these types of cuts won’t come anywhere close to covering budgetary cost of the tax cuts they have planned, and the hope that tax cuts will increase economic growth and hence tax revenue is undercut by the failure of tax cuts to stimulate economic growth during the Bush and Reagan administrations.

That will leave Republicans with two choices (assuming that health care reform is dead, as it appears to be). They can allow the national debt to expand substantially, by trillions if they make good on their tax cut promises, or they can cut entitlement programs such as Social Security and Medicare. They could also give up on the tax cuts, but that’s not going to happen.

But as Republicans in Congress contemplate trying to finance tax cuts for the wealthy with cuts to programs such as Social Security, they should realize that many of the same market failures that made health care reform so difficult also plague social insurance programs more generally. There’s a reason why government got involved in these markets in the first place.

Consider the individual mandate, a feature of Obamacare that Republicans have targeted for criticism. Social Security also has a mandate – if you report income to the government you have no choice but to pay Social Security taxes—and the program wouldn’t work without it.

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When people are left on their own to save for retirement, many people, despite the nagging feeling that they ought to be putting money away for the future, fail to do so. Immediate needs are more important. Taking care of family needs – just getting by each month – takes precedence over saving for the future.

But when people don’t save anything and arrive at old age penniless, society won’t let them be homeless and starve. Our social conscious will not allow that. However, the costs of giving people the basic necessities of life will be borne by society at large. Wouldn’t it be better if people were mandated to contribute to their retirement during their younger, working years? Even if their contributions don’t fully cover their retirement needs, isn’t it better if they cover at least some of the costs? That’s what the mandate does. It ensures that a fraction of every paycheck is put away for the future.

Some people will save for retirement, but there are considerable uncertainties. Do I need to save enough to live into my 90’s, or will less savings be enough? This type of uncertainty seems to be easily overcome by insurance markets. People contribute to a retirement fund, and those who are unlucky and have lifespans that are shorter than average fund those who are lucky enough to live longer. Smoothing these kinds of risks (in this case against running out of money in old age) is what insurance markets are supposed to do.

Here’s the problem. Retirement insurance is a bad deal for people who have family histories or other reasons to believe that will not realize a typical lifespan (the average lifespan determines insurance premiums they would pay). If a large number of people who do not expect to realize an average lifespan drop out choosing instead to save on their own – they don’t think they will need to save as much as insurance asks them to pay – premiums will have to rise since the insurance pool will be made up of people who are likely to live longer than average.

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But as premiums rise, more people conclude it’s a bad deal and drop out, premiums rise again causing even more people to drop out, and as this continues the market will eventually collapse leaving people no choice but to save for retirement on their own. But, for the reasons given above, leaving people to save for retirement on their own doesn’t work. The only way to solve this problem is a mandate for everyone to contribute to a retirement fund, and that requires government to intervene in these markets.

As Republicans try to find a way to implement their tax cut plans without exploding the national debt, they will face the same problem they faced with health care. The only way to fund the tax cuts is to cut programs millions of people depend upon, programs that only government can provide. Cutting either Social Security or Medicare would have severe political repercussions.

Large tax cuts for the wealthy without a significantly increasing the debt is an impossible task.