Reviews | Has Liz Truss finally killed the tax cut zombie?
What does this dizzying series of events mean for future American tax-relievers? Republican politicians ignore economists who oppose tax cuts, because it’s a policy no one in the Republican coalition opposes. Even low-income Republican voters who don’t have much to gain from tax cuts like the tax cuts, which helped make George W. Bush the president whose policies best matched what the public American, even the poor, wanted. Lowering taxes has also been the flagship national economic achievement of Donald Trump’s presidency.
At the same time, the UK debacle comes at a time when the US right is slowly moving away from free market orthodoxy. The GOP takes a more populist side and wants to be seen as a party of the working class, criticizing commerce and “woke” corporations.
Does the fate of Truss show that big tax cuts, especially for the wealthy, are no longer a credible option? Have the markets finally understood what the economists are saying? Would the next American politician proposing major tax cuts meet the fate of Truss?
Truss cut taxes at a time when interest rates are rising slightly, fueling investor concern. When Trump cut taxes, interest rates were lower. On the other hand, interest rates were at similar levels under George W. Bush, and they were significantly higher when Ronald Reagan cut taxes, suggesting something else was going on.
The pathways of financial markets are inscrutable even to the people who make up those markets, but there appear to be big differences between Britain and the US that suggest the US may not face a crisis. similar the next time their government proposes major tax cuts. .
One factor is that the UK – even under Margaret Thatcher – has failed to cut taxes as previous conservative US presidents have. Thatcher is Truss’ idol. When she was 7, Truss played Thatcher in her school’s mock election. During this summer’s leadership campaign, Truss adopted Thatcher blouses with bow ties and repeatedly proclaimed her Thatcherite credentials.
But when Thatcher took office in 1979, taxes in the UK were around 30% of GDP, and when she left office in 1992 they were around 30% of GDP; Thatcher had actually raised taxes dramatically during his first term, only bringing them back later. In fact, the argument that tax cuts would automatically lead to economic growth had not gained much credence in the UK at the time, as Thatcher’s Chancellor Geoffrey Howe later noted: “My Treasury team and I had never succumbed—never seriously anyway—to the mistaken interpretations of Lafferism, which have so far misled some American policymakers. Supply-side economics was never a big part of Thatcher’s economic policies, which instead concerned privatization and sales of public housing. Truss’s attempts to pass off his tax-cutting madness as Thatcherism show not only that Truss did not understand economics, but also that she did not understand Thatcherism.
The other difference between the US and the UK is that the US might simply be better able to fund its large debt – or at least has been so far. Until the 2008 financial crisis, general government debt stood at around 100% of GDP in the US, but only 50% of GDP in the UK. After this period, debt increased in both countries, but it was still considerably higher in the United States than in the United Kingdom. It has only been in recent years since the pandemic that the UK has started to close the gap, with public debt around 150% of GDP in both countries. It took decades of experimentation and repeated incremental deficit and debt increases to bring the United States to a point where investors are calm about these numbers.
US officials are nervously considering whether the United States might face its own turmoil after the British calamity, and no one knows what will happen next. But a look at the recent past suggests that one of the reasons markets have reacted so badly to Truss’s policies is because investors haven’t gotten used to the idea that the UK is now a country with permanently high debt, just like the United States.
John Maynard Keynes taught us that deficits and debts are not necessarily bad. In America, both the left and the right have rediscovered it, at different times and in their own way. In the 1980s, the far right in the United States argued that deficits didn’t matter if the economy grew faster than the cost of servicing the resulting debt – and they believed that cuts in taxes would cause the economy to grow very rapidly. Ironically, the far left, by embracing « modern monetary theory », is now arguing the same thing – that as long as we use borrowed money in ways that make the economy grow faster, we can finance the cost and not worry too much about borrowing. Sure, they identify different policies to grow the economy, but the resulting flippancy about deficits and debt is the same. Neither the British right nor the British left have fully gone through these intellectual revolutions.
There are fundamental reasons for this divergence between the two countries, including the different role the United States plays in the global economy, but the bottom line is that the United States has been able to sustain high debt for decades without scare the markets. That means U.S. markets may not panic at the prospect of progressively higher deficits the next time a U.S. president attempts major tax cuts.
That said, the tax cut zombie was on its last legs in the United States even before all of this happened. The GOP’s turn to Trumpism has focused the party much more on the culture war or simply suppressing the vote. Republican politicians aren’t really running on tax cuts anymore, because taxes have been cut so much, especially for the poor and middle class, that tax cuts just aren’t as popular anymore. So even before Truss fell, the tax cut zombie was already nearly dead.
But of course, that’s always what the protagonists of the film think.