Congress is aiming to get the new tax plan signed into law by the end of the year, with it containing enough change to affect the economy, which raises the question of whether politicians should even have the power to enact economic change in this way. Just because the constitution gives congress this ability doesn’t mean they are necessarily qualified. Less than 20 percent of Congress holds a degree in business or economics, and even those that do often don’t follow economic principles because their main concern is getting reelected. Because of these factors, politicizing the economy can be a dangerous action with grave consequences.
The tax code should, in theory, work together with the United States Federal Reserve (the Fed) to help keep the economy within a steady range of balanced growth. The economy is cyclical in nature. It tends to always grow but at times the rate of growth is intense and at times the rate of growth is decreasing (recessionary). Left alone, the economy will self-correct, in theory, but that leaves the risk of extreme growth or extreme recessionary periods that can cause consumers to become uncertain. Uncertainty is always bad for an economy. As a result, the Federal Reserve, a non-partisan committee, distinct from the government, is in charge of setting the federal funds rate. This rate is essentially the price of money, and is the backbone for interest rates in the rest of the economy. In general, the Fed will decrease rates to help the economy out of a recession and increase rates when it might be growing too quickly. For best results, Congress should follow the Fed’s actions with changes to taxes, generally cutting taxes and increasing spending (in the right areas) when rates are cut, and increasing taxes and decreasing spending when rates are hiked. This allows for the most optimal and smoothest growth in the economy- not too many ups or downs.
In practice, Congress doesn’t tend to make these textbook moves. Since 1954, overall taxes have steadily decreased, with very few increases along the way, while the federal funds rate has made moves in both directions, not following a clear trend. Giving Congress the reigns on this decision when the vast majority of it isn’t well versed in the economy can naturally lead to this outcome. This is only compounded when most of congress is making calculated moves to get reelected, and their constituents like lower taxes at all times, regardless of current economic conditions.
While the new tax plan is still being modified and some say it might even be a tax increase despite being labeled a tax cut, it looks to be an addition to the trend of overall lowering taxes. And it comes at an interesting time. The Fed has hinted at raising rates and there is almost 100% certainty that it will happen at the next Fed meeting in December. Even though this is a small rate hike, it’s the start of continued slow rate hikes in the future. So, cutting taxes now goes against what the Fed is doing. The economy is getting mixed signals: lower taxes that can allow for growth but higher rates that can slow growth and prevent too much inflation and uncertainty from arising. Politicians trying to get reelected are instead causing the unintended consequence of this uncertain economy.
In fairness, the tax code itself is overdue for an update. There are over 70,000 pages of tax law and that number continues to grow. A simpler, easy to understand tax code is something that is likely in favor of all parties involved. So, in some senses the tax change isn’t the worst thing in the world. At the same time, the economy is in an unprecedented state. Unemployment is at about 4%, below the natural rate of 5 percent that should in theory cause some inflation to occur. percent, puzzling some economists.
Politicians acting in the interest of getting reelected without fully understanding the consequences is a dangerous trend. To fix this issue, term limits can be enacted. These limits would cause congress to not rely as heavily on the actions that get them reelected, and make it more likely they do the right thing. Regardless of how this issue is solved, allowing people to steer the economy and their own reelection prospects with the same steering wheel is a dangerous proposition.
Joseph Racanciello is a contributor for The Daily Campus. He can be reached via email at firstname.lastname@example.org.