Deficits by Tier: Payback of the 2017 Tax Act by Wealth

Abstract

In his American Economic Association Presidential Address Olivier Blanchard argued that the deficits caused by the 2017 Tax Cut are welfare enhancing. Growth of the economy is greater than interest costs, both currently and usually and that indicates we are borrowing when we are relatively poor and will repay when richer.

But the 2017 Act gave a tax cut as incentives to capital shared pro rata to wealth, when capital was in glut. Pure capital did not have a positive net present value because risk-free interest rates were negative and now hovering around zero. Now we are told the borrowing must be repaid by cuts to Medicaid, social security and regressive sales tax.

That sets up a pattern that maximizes the damage to welfare. We cut rates so that Uncle Scrooge can have another dollar to swim in in his vaults with repayment by those near destitution. One cannot judge welfare without analysis of who is getting the benefit of the deficit and who will repay.

Beyond the article, Blanchard has both conceded the point and clarified his position: “In my American Economic Association piece, I said debt is probably bad on net, but can be used for good purposes, so benefits exceed the costs: closing an unemployment gap, or doing public investment. This was not the case for the 2017 tax cuts and the resulting deficits. And, indeed the deficits might be used for a starve the beast strategy, making things worse.”

The Article then inventories ideas that will both increase efficiency and also reach wealth, including ending step up in basis at death, “fire sale” tax rates on capital gain, negative tax from combination of expensing of costs and interest deduction, capital gain rate and step up in basis, repealing the section 199A passthrough deductions, and acheiving better valuation for the estate tax.

Keywords: 2017 Tax Cut, deficits

JEL Classification: H20, H21, H24, E60, E64