Tax Win Will Be Huge for Trump, But Don’t Bank on Political Windfall

By Stephen Collinson

In decades to come, people will talk about the Trump tax cuts as they now reminisce over the Reagan, Bush and Kennedy giveaways.

Barring a last-minute cataclysm on Capitol Hill, President Donald Trump is set to savor a major tax reform package before Christmas and finally secure an achievement that will live alongside him in history.

But it may not follow that the most sweeping tax cut bill in 30 years will measurably improve the President’s tenuous political plight after a turbulent first year in office.

The boom scenario for Trump is that tax reform will supercharge economic growth, juice the already soaring stock market, revive mothballed factories in Trump country and indirectly nurture his political recovery.

All the better for the GOP if that happens before the midterm elections in November.

But it’s just as likely that benefits will take years to unfurl, are too small to enrich most Americans and may turn out to be a political loser because they could demonstrably deepen inequality and fan societal resentment.

In that case, a political dividend from tax reform could be limited.

“In the next 11 months, how much are you going to change the economy and how much are people going to feel that change so that you are actually changing people’s vote?” said Wayne Winegarden, senior fellow at the free market Pacific Research Institute.

“I don’t think it is clear, especially because (the tax bill) has been jammed through in such a short period of time. It is going to take firms time to adjust and change their investments. You may not feel that short term impact.”

Still, for a White House perpetually under siege, mired in internal acrimony and at the mercy of Trump’s whims, the tax win, when it comes, will be huge.

Democrats will carp that it was passed in secret, soaks the rich and doesn’t live up to its billing. But the measure will register as a significant achievement for the President and his GOP allies.

Alongside the appointment of Supreme Court Justice Neil Gorsuch, the bill represents Trump’s best chance so far to permanently reshape the economy and American life.

But there are political factors at play that could deprive the President of full value for his victory, including the fact that he is such a polarizing figure.

And with 2018 shaping up as another year of turmoil, with crises like the nuclear showdown with North Korea spiking and the Russia probe potentially coming to fruition, it is possible that other major events will do more to shape the Republican Party’s fate than tax reform.

Then there are actions under Trump’s control — like his hostility to free trade. And then there are those outside it — like some unexpected financial crisis — that could darken voter perceptions of the economy and influence the political weather.

For now, though, Trump just wants a win.

“We’re so close right now, so close, in fact, almost, I don’t want to talk about it. Maybe we shouldn’t talk about it,” Trump said Wednesday, rhetorically closing the stable door after the horse had bolted, given his promise moments earlier of a “giant” tax cut.

There are many reasons to think that the political dividend from passing the most sweeping tax reform since the Reagan era will be limited.

An unpopular President with a 32% approval rating and an even more despised Republican-led Congress with an approval rating of 16% is about to pass a bill that has only 29% support — hardly a sure recipe for a political winner.

While Trump is promising a “big, beautiful Christmas present” for Americans, this bill, according to multiple independent surveys, is weighted in favor of the most well off and corporations. Many individuals who get tax cuts will see them phased out over a period of years and some taxpayers will lose deductions that help them pay for medical care and higher education.

And as they combine the Senate and House bills, the Republicans may have made the reform even more unpopular since they are expected to drop the income tax rate for top earners from 39.6% to 37%, apparently at the behest of the President.

That made it even easier for Democrats to paint the bill as a fat giveaway to Trump’s rich friends.

Senate Minority Leader Chuck Schumer (D-NY) warned of a GOP meltdown next November as he tried to get Republican leaders to delay the bill until the newly elected Democratic senator from Alabama, Doug Jones, arrives early next year.

“It is our hope that Mitch McConnell will realize proceeding with this tax bill will be a dramatic, dramatic death knell for the Republican Party in 2018. It’s a loser,” Schumer said Wednesday.

Every tax bill has unpredictable political effects since it takes away benefits taxpayers like and inconveniences tens of millions of Americans.

When taxpayers come to realize that some of the headier Republican claims are a mirage, there may be a backlash.

For instance, Trump claimed Wednesday that the corporate tax cut from 35% to 21% would swell growth and job creation and mean a $4,000 income windfall for Americans.

“It’s like having a $4,000 increase, which isn’t bad,” he mused, though he did not mention that such largesse was at the very highest ends of estimates about the impact of the bill.

At a 30,000-foot level, Trump’s speech at the White House amounted to an argument that the bill would unleash growth, prosperity and stock market bull runs that would usher in a new era of economic well-being and bulging 401(k)s and by implication dispose voters well toward Republicans.

According to the “it’s the economy, stupid” theory of politics, that would be good news for Republicans in 2018 and Trump in 2020.

“This moment will forever be remembered as a great new beginning, the dawn of a brilliant future, shining with patriotism, prosperity and pride,” Trump said, noting that stocks had hit 85 new highs since he took office.

But given Trump’s unique profile, his re-election bid may test the truism that a firing economy is the route to a victory. There’s also evidence that historically tax reform bills have had little direct impact on the direction of stocks.

Matt Lampert, director of the Socionomics Institute, said a condition known as social mood — the shared mental state of humans rooted in emotions, beliefs and actions — is what moves markets.

“The stock market may go up, down or sideways, but tax reform will have nothing to do with it, nor will the actions of any politicians. Social mood will march to the beat of its own drum and the politicians will be along for the ride just like everybody else,” Lampert said.

Still, he said, there is historical evidence that when markets head in a positive direction, incumbent presidents have a better chance of winning re-election than when securities are dipping.

Rising markets are also a better indicator of a president’s chances of a second term than traditional macro-economic variables, like inflation or GDP growth, often cited by election tipsters.

So Trump may need to keep stocks surging to make sure he’s not fired in 2020.

But the tax bill is probably not the way to do it.

Read more . . .

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

Scroll to Top