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Tax cuts help, but we need our free economy back

Conservative Review

The job market is booming and wages are rising. Yet gross domestic product growth is still languishing. What gives?

Last Friday, the Bureau of Labor Statistics announced that 223,000 jobs were created in the month of May and unemployment is now at its lowest level since April 2000. A record 155,474 million Americans have jobs. Just over six million people were unemployed, which is the lowest level since 2001, and that was when the labor force was 18 million people fewer than it is today.  Now there are 6.7 million job openings – a record – and openings are outpacing the number of people looking for work. Black unemployment is at an all-time low. Wages rose by 2.7 percent over the past year to an average of $26.92 an hour. Best of all, the employment growth is not only not built off growth of government but off the Trump administration cutting 24,000 public-sector jobs.

In terms of the business cycle, it doesn’t get better than this. We are finally at the prosperity “boom” stage of the cycle. But the good news also portends very bad long-term economic health. If this is the best the economy can get, how come economic growth was just 2.2 percent last quarter and we are still not hitting 3 percent, much less 4 or 5 percent growth annually that has historically been associated with an economic boom?

The sad reality is that we no longer have a free, organic economy. We have a centrally planned and distorted economy that even at its peak strength is weighed down by the albatross of statism so much that even solid tax cuts cannot ameliorate the effects.

It’s hard to deny the success of the tax cuts in promoting this degree of expansion in the job market. One could argue that the economy was on its way to recovery before the tax cuts, but it’s unlikely that the job market would be this good with wages increasing if not for the historic corporate tax cut.

The biggest argument against promoting a tax cut and enjoying all the economic benefits thereof was the budgetary cost. The Congressional Budget Office predicted the feds would lose $144 billion in this fiscal year alone, $271 billion in the next fiscal year, and a total of $1.5 trillion over 10 years. But that is not panning out. To begin with, revenue was already on a record trajectory over the past year. For the first seven months of the fiscal year, revenue is up $83 billion over this time last year. Now, obviously since the tax cuts were enacted in January, revenue has gone down some relative to the baseline, but it’s actually still increasing in absolute numbers.

Overall, revenue for the first four months of the calendar year is up roughly $50 billion or 4.2 percent relative to January-April 2017. Clearly, some of this is temporary due to businesses and individuals front-loading and shifting their tax filing to the earlier tax year to benefit from some of the expiring deductions. Over time, the Treasury has to lose some money, but if you peek inside the numbers, it’s clear the loss won’t be anywhere near what the CBO predicted, because the economic growth is adding more jobs and more taxpayers.

Obviously with the massive corporate rate cut, that section of revenue plummeted 30 percent for the first four months of the year. However, corporate taxes were never a big share of the revenue pie to begin with (accounting for only 9 percent of gross revenue last year), so it only amounted to a $26 billion revenue loss relative to last year. While corporate taxes never meant much to the federal coffers, they do matter for economic growth, especially when coupled with the individual rate cuts. Revenue from individual income taxes, on the other hand, increased by $68 billion, and payroll tax revenue grew by $12 billion.

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