Donald Trump ran on the promise to make America great again. Though hardly central to that promise, tax reform has been presented as part of the path back to such greatness, however that greatness may be defined. Unfortunately, perhaps due to the President's populist urges, perhaps due to pressure brought to bear on GOP legislators by wealthy donors, perhaps due to mere desperation to pass something, tax reform has morphed into little more than supply side-style tax cuts that once again make the dubious promise to pay for themselves through the enhanced economic growth they are expected to unleash. That is not a path to greatness. In fact, it is almost certain to hasten our decline as the promised growth turns out to be a mirage and budget deficits instead balloon to even more dangerous levels.
The reasons the proposed cuts are so ill-advised are twofold. First, growth expected as a result of tax cuts is premised on the belief that lack of capital is the cause of our anemic and uneven economic performance. It is not. Quite simply, the U.S. economy has unprecedented cash at its disposal for investment purposes. The challenge is not finding investment capital, it is finding worthwhile places to invest it. As it is, as of last year, U.S. companies held over $1.9 trillion in cash domestically, in addition to the $2.5 trillion they hold overseas. Furthermore, investors hold another $2.66 trillion in essentially interest-free money market accounts, while banks have another $2.15 in excess capital residing at the Federal Reserve. In all, this amounts to more than $9.2 trillion, $6.71 trillion of which sits within our shores, available to fund economic growth. That this cash is sitting in accounts that essentially pay zero interest should suffice as proof that businesses cannot find better uses for it. A recent show of hands at a gathering of CEOs proved as much when only a smattering of hands went up when asked who expected to increase capital investment if tax cuts became law, perplexing White House Chief Economic Advisor Gary Cohn.
This is borne out elsewhere in any discussion one has with corporations, venture capitalists or private equity investors, who uniformly report that the most difficult task they have is finding worthwhile uses for their cash. The corollary to this story comes from startups and businesses who repeatedly state that finding cash is the least of their challenges. In fact, nearly any viable small to medium-sized business will speak of the steady stream of investors offering to acquire them or take them private. All of which exposes the fallacy behind any of the current tax proposals. Far from fueling growth, they are likely to simply fuel inflation, asset bubbles and eventually, higher interest rates that will choke, rather than fuel, economic growth.
Worse yet, any such strangling of our financial position could not come at a more dangerous time for the U.S. economy, which, already facing record levels of public debt and the Social Security and Medicare obligations for a wave of retiring baby boomers, finds itself competing with an ascendant China that will control much of the debt we owe. That our greatest economic rival will not only hold an increasingly strong global economic position, but also great sway over our ability to finance our debt, is likely to bring back the specter of 1970's style stagflation, where growth is impeded as prices rise.
Now is not the time to reduce taxes in the misbegotten belief that it will fuel future growth. Go ahead and encourage the return of overseas cash by offering a temporary tax amnesty, but we should not risk the financial future of the United States by pursuing tax policies that are questionable at best and dangerous at worst. We have been lulled into a false sense of security by artificially low interest rates resulting from the Federal Reserve's quantitative easing. However, the day draws nearer when such schemes will no longer be able to keep market forces at bay and interest rates will once again accurately reflect faith in our willingness and ability to meet our debt obligations. Given our record of fiscal irresponsibility the past few decades, we can expect that faith to be severely tested. As of this writing, the U.S. is still seen as the world's safest haven for investment, but once that faith teeters, we are likely to find ourselves no longer in control of our economic destiny as those who hold our debt will determine how much we'll be allowed to borrow and at what rates.
A world where Russia manipulates our elections while China holds the strings to our finances hardly sounds like the recipe for greatness, because it is not. It is a recipe for disaster that threatens our sovereignty as no foreign invader ever could. We should not - must not - give in to desires to deliver a political victory that ignores the long-term economic, political and human cost such poorly conceived tax policy would deliver, lest we want this era to be central in historians’ search for the inflection point that signaled the decline of the United States. It is that serious. The time to act is now and it is time to say enough. Let this be the moment that fiscal responsibility returns to the U.S. economy.
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