Thursday Musings on the OBBB Act

Yes, it’s Thursday, and yes, I’m still writing about the House Ways & Means Committee’s budget reconciliation billintroduced last week. That’s because it moved one step closer into being made into law this morning—and there’s a lot to unpack. Today, I’m zooming out the lens a bit to focus on its economic impact.

I don’t mean to sound like the sky is falling or anything, but the proposal, framed as an extension of the 2017 legislation known as the Tax Cuts and Jobs Act (TCJA), is about as sharp a turn away from policies designed to stabilize the US economy as it could be at a really critical moment (a looming trade war, etc.). Months from now, we might look back at it and realize it came at precisely the wrong time. Here’s how I arrived at that conclusion.

On balance, we’re a nation of consumers. Something on the order of 70% of the US economy is based on household consumption. And when a recession looms, the surefire way to stave off its ill effects is to get money into the hands of consumers who will spend it. It’s simple, really: increase demand and keep the consumption engine humming.

But one’s marginal propensity to consume is inversely related to one’s income and wealth. In other words, the bottom half of earners are more likely to consume than the top half of earners, all else equal. I’m simplifying here, but the highest income earners tend to consume what they want—recession or not—whereas the lowest income earners consumption patterns depend upon a host of factors, including larger economic forces.

So, to whom do the benefits of the bill flow, you ask? If it plays out like the TCJA did, then, the Center on Budget and Policy Priorities estimates that at least half of the benefits of the bill accrue to the top 5% households by income earned. Similarly, the Tax Policy Center estimates that 68% of the bill’s tax benefits redound to the top 20% households by income earned. Hence, the taxpayers who may need the cuts the most aren’t getting them under the proposed legislation.

Despite jittery markets and so-so jobs reports, I’m not saying we’re necessarily on the edge of a potential economic slowdown. But maybe we are. And if we are, this legislation does the opposite of what it should be doing. It risks an awful lot, not the least of which is mistaking who the taxpayers are behind the consumption power on which our economic engine runs. And its price tag is enormous, requiring $2.6T in borrowing. Maybe worse still, it slashes public programs while undermining the financial viability of nonprofits that serve as the public good where the government does not or cannot. This means that help may not be coming for those who need it most.

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law