Pence Was Right. Now Is Not the Time to Raise Taxes.
Or increase regulation. But it’s also not the time to undercut the recovery with neglect.
|Abby M. McCloskey||Oct 9, 2020||32||47|
In his debate with Sen. Kamala Harris on Wednesday, Vice President Mike Pence warned about Democrats raising taxes on Americans and stunting the nascent economic recovery. He was right to do so, although the current administration could also use an economics refresher.
Sen. Harris claimed that Biden’s tax plan would raise taxes only on people earning more than $400,000. She then announced that a Biden administration would get rid of the Trump tax cuts—as soon as Day 1 (impossible as that may be)—which lowered taxes for the vast majority of Americans across income groups, according to a range of liberal and conservative estimates.
In other words, it’s a bit like the Trump administration supporting an overturn of the Affordable Care Act while promising to protect pre-existing conditions. The former necessitates sacrificing the latter in the absence of a more specific plan.
The direct incidence of Biden’s income and payroll tax plan is on higher earning households. But there’s widespread agreement that low-and-middle income households still would see their after-tax income go down from his proposed tax reform. How? This decline is largely due to the promised hike in the corporate tax rate, which would be paid for not by big business alone but in large part by workers in the form of reduced income.
So, yes, repealing the Trump tax cuts would raise taxes on most Americans, and the Biden tax plan will reduce after-tax income for most Americans, albeit indirectly.
(Complicating all of this is that public opinion has not caught up with the reality of tax savings from the Trump plan, with a significant number of Americans believing the tax cuts didn’t accrue to them or that their taxes actually increased, a testament to partisan messaging.)
To be sure, one could make the case that given our historic debt and COVID-19 spending, the U.S. needs to move to a higher tax incidence over time. Government spending that’s not paid for on top of passing tax cuts without attendant spending cuts (as with the Trump tax bill) has put us on an unsustainable path.
But doing so in the midst of the most fragile economic recovery on record is precisely the wrong time to do it. We are just barely out of the pandemic recession—still sputtering—and the economic recovery needs to be fanned, not put out by a slew of new taxes, regulation, and policy uncertainty.
Which brings us to another point from this week’s debate. Harris claimed that President Trump was simply riding the coat-tails of the Obama administration’s success on the economy. This too, deserves some correction, lest we repeat history.
Before the ravages of COVID-19, the first two years of the Trump administration were some of the strongest in recent memory economically. Estimates for annual economic growth in 2018 were on track to be 3 percent—the highest it’s been since 2005. The unemployment rate was the lowest it’s been since 2000, the stock market hit record highs, and our national GDP has surpassed $20 trillion—the first economy in the history of the world to do so.
This was no accident. In addition to the tax cuts, which lowered the burden on businesses and individuals by $1.5 trillion, the president pursued aggressive regulatory reform, instituting a requirement that two regulations must be eliminated for every new regulation issued.
Those efforts showed that the weakness of the recovery from the Great Recession was not merely an inevitable result of the financial crisis. The Obama administration made poor policy choices in terms of excessive regulation (the pages of the Federal Register, a proxy for the U.S. regulatory burden, increasing to record lengths) and sweeping legislation like the Affordable Care Act that created stagnation and uncertainty at a time we needed growth.
As a result, the National Federation of Independent Business’s Small Business Optimism Index reached historic lows from 2009 to 2016 with government intervention as the main reason why—recovering only after the 2016 election. By 2018, the U.S. was ranked the most competitive economy for the first time in a decade by the World Economic Forum.
Policy matters. Creating space for innovation, competition, and free markets to work matters. And it matters even more when trying to emerge from a place of economic weakness. The analogy today is that if the Democrats win a blue Trifecta and pass sweeping regulatory, tax, and legislative changes just as we are coming out of a very deep recession, this too could delay and slow our economic recovery, as was the case in the Obama era.
But Republicans, including Pence and Trump, are not off the hook. Two points: First, the topline economic indicators—even in the early years of the Trump administration—were not emblematic of the experience of all, or even many, Americans. As Republicans touted the soaring stock market, growing economy, and low unemployment rate, their rhetoric became disconnected from the experiences of many Americans, whose communities were hit by weakened labor force attachment, low wages, a weakened social fabric, and deaths of despair. Then and now, Republicans must look beyond raw economic growth to build an economy that is inclusive, dynamic, and sustainable.
Second, while COVID-19 has hamstrung economies worldwide and would have been done so regardless of who was president, the administration has made poor choices about how to handle this shock. They could have owned it from the beginning, creating mass mobilization efforts of PPE, reducing uncertainty wherever possible through clear and consistent information.
Instead they gave mixed messages that helped politicize precautions like masks, and inexplicably pulled out of the next round of stimulus talks until after the election, which were baked into any rosier scenario about how fast we come out of our economic slump. AEI’s Michael Strain recently pointed out that the compromise package being discussed between Pelosi and Mnuchin would have boosted GDP by 3.5 percent and lowered unemployment by 1.2 percent, resulting in almost 4 million additional jobs at the end of 2021. Now there’s talk of ricocheting back into talks, compounding the uncertainty. Economic leadership is about stewarding the hand you’re dealt even in bad times, not just championing the successes.
On Wednesday, Pence delivered an effective critique of the Biden tax plan and progressive agenda, but lacked a positive agenda for moving us forward. Coming out of the VP debate, both political parties would be well advised to give more thought to how we rebuild our economy coming out of this pandemic—instead of launching a partisan spending spree only loosely related to the crisis or pretending that by simply keeping on with the status quo, this nightmare will be behind us in no time.
Abby M. McCloskey is an economist and founder of McCloskey Policy LLC. She has advised multiple presidential campaigns.
Photograph by Morry Gash/Getty Images.