There’s been a lot of speculating as to whether President Donald Trump’s tax plan will help or hurt his party next year. We’ll know soon enough, so no point in leaning too far into this question, but here are things to watch for. On balance, I think they tilt against the plan’s reception.
To be clear, the pluses and minuses I raise below are the sorts of things I think people will notice, care about and link to the tax plan. While wonks such as me will object, for example, to the higher 2018 budget deficit, most people don’t notice that sort of thing. (The Congressional Budget Office expects the tax cut to add almost $140 billion to next year’s deficit.) Here’s what I think might quickly get noticed.
Higher health insurance premiums: When these go up next year — as they do every year — the Republicans will, by dint of repealing the individual mandate, probably be blamed. They will try to argue that premiums were going up anyway, but they’ll lose that argument.
Higher corporate profits and stock market prices: The sharp corporate tax cut takes effect in 2018, and it will continue to juice realized and expected after-tax profits, as well as corporate share prices. So why is this a negative? Given their healthy skepticism re trickle-down effects, many in the public view this as one of the plan’s least desirable outcomes.
New York Times columnist Bret Stephens argued that regular folks will be happy to see higher stock prices reflected in their retirement accounts, but that’s because he’s conflated shareholdings with share values (it’s the latter that matter most).
According to recent data from NYU professor Edward Wolff, the richest 10 percent hold 84 percent of the value of the stock market; the richest 1 percent control 40 percent. I strongly doubt anyone’s going to give the tax cuts credit based on any movements in their IRA or 401(k) accounts, and given the negative background noise about rising corporate profitability, these dynamics may well generate more near-term resentment re the tax plan than appreciation.
Implementation: Any tax change of this magnitude is a complicated bit of work, requiring the tax authorities at the underfunded IRS to quickly implement new systems and provide new oversight. To his credit, at least one Republican on the House tax-writing committee recognizes the need for more IRS funding, but I’d be surprised if it materializes.
Employers and the companies that administer their payrolls must, pending guidance from the IRS, quickly adjust their employees’ W-4 forms to ensure that the correct amount is withheld. Eventually, by February at the soonest, that should lead to slightly higher paychecks for most workers, but any hiccups in the process will be amplified by the political scrutiny of the moment.
Some key economic indicators: People notice higher interest rates on home, car and student loans, and rates are surely going up next year. Part of that is the Federal Reserve’s “normalization” campaign as they raise rates back to more normal, higher levels, but the anticipation of faster growth next year, juiced in part by the tax cut (the higher deficit spending noted above), is also nudging at least short-term rates up a bit.
Bad first impression and few trust Trump: You only get one chance to make a first impression, and this plan made a bad one out of the gate. It’s hard to turn that around, especially with a widely mistrusted president who constantly lies about everything.
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of “The Reconnection Agenda: Reuniting Growth and Prosperity.”