House GOP lawmakers push permanent tax cuts amid soaring inflation

House Republicans on the chief tax-writing Ways and Means Committee are seeking to make the tax cuts and adjustments enacted in the 2017 overhaul of the tax system permanent, a move economists say would stimulate the economy at the same time the Federal Reserve is trying to rein in demand against 40-year-high inflation. 

Ways and Means Republicans touted a proposal on Wednesday that would extend tax provisions in the Trump administration’s Tax Cuts and Jobs Act. It would renew a 20 percent deduction for businesses, maintain a higher standard deduction and extend lowered tax rates for households. 

Another bicameral measure proposed by Rep. Jodey Arrington (R-Texas) and Sen. Pat Toomey (R-Pa.) would allow machinery costs to be written off as tax deductions when they’re purchased, as opposed to over time, and would effectively cost around $200 billion over 10 years. 

“[The tax cut] will begin to phase out — a huge hit to industry like farming, manufacturing and I’d just say business in general. They need capital the most. I’d like to highlight Jodey Arrington. He has a bill that will make full expensing permanent,” Rep. Vern Buchanan (R-Fla.) said during a presentation Wednesday.

A write-up of that bill says it “makes permanent one of the most pro-growth policies in the Tax Cuts and Jobs Act: full and immediate expensing.” A write-up of Buchanan’s bill says it would “create certainty for the pro-growth provisions.” 

But economists say that cutting taxes and increasing the deficit at a time when persistent inflation needs to be tamed will only add fuel to the fire of price increases. Altogether, the tax cuts in the 2017 law added $1.9 trillion in government debt through 2028. 

“The method of financing is what matters. If it’s deficit financed, that’s going to have the highest risk of those tax changes playing into inflation at least in the short run. If it’s financed through other means, you’re not necessarily going to see that trade off,” Garrett Watson, an analyst with the Tax Foundation, said in an interview with The Hill. 

“The challenge and the ambiguity is that you’re doing two things at the same time. You are increasing long-run supply incentives, which are incentives to invest in the form of a 100 percent bonus, but you’re also in the short run, depending on the nature of how you finance it, feeding into the demand side,” he added. 

Asked whether the cuts will add to inflation and if Republicans are working in opposition to the Federal Reserve’s monetary policy, Ways and Means top Republican Kevin Brady (Texas) said that economic conditions were improved by the 2017 tax overhaul.

“Unlike the cruel economy of President Biden, under the modernized Republican tax code of 2017 America’s economy was growing, paychecks were rising twice as fast as inflation, jobs were coming back from overseas, millions of Americans were lifted out of poverty and communities enjoyed record business investment here in America,” Brady said in a statement to the Hill.

Data from the Labor Department released earlier this month showed that inflation has remained above 8 percent for seven months in a row. The Federal Reserve, in response, has raised the interest rates to slow economic activity and bring prices down. 

In the minutes of its latest rate-setting meeting, the Federal Reserve said that slower economic growth is specifically what would help inflation come down. 

“[Meeting] participants noted that a period of below-trend real GDP growth would help reduce inflationary pressures and set the stage for the sustained achievement of the Committee’s objectives of maximum employment and price stability,” the September meeting minutes read. 

“In light of the broad-based and unacceptably high level of inflation, the intermeeting news of higher-than-expected inflation, and upside risks to the inflation outlook, participants remarked that purposefully moving to a restrictive policy stance in the near term was consistent with risk-management considerations.” 

A June study published by the San Francisco Federal Reserve found that current inflation is caused more by supply factors than demand factors. “Supply factors explain about half of the run-up in current inflation levels” while “demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors,” the study found. 

Some Republicans’ comments on Wednesday appeared to openly disagree with the Federal Reserve’s interest rate hikes. 

“All of this big government interventionist policy in the middle of a recession, by the way, including new taxes, has made real wages drop by $5,000. And here’s their answer: Let’s just pummel the American people more. Let’s try to solve this inflation problem with higher interest rates. Let’s try to reduce the growth of our economy instead of enhancing and letting loose the supply side,” Arrington, the Texas congressman, said. 

Other economists also pointed out that the GOP proposals could add to inflation.   

Harvard University economist Jason Furman quipped on Twitter that the Republican program could be dubbed the “Inflation Increasing Act of 2023.” 

Some economists have also noted that deficit-financed tax cuts just brought down the government of the United Kingdom, so the political sensitivity around such measures during a period of increased inflation is high. 

“Obviously we’ve seen what’s been happening in the U.K. If you push for unfunded tax cuts in a way that people don’t believe will be sustainable, that will be problematic,” the Tax Foundation’s Watson said. 

Analysts say that over a longer span of time, some of the proposed tax cut extensions could be deflationary but that the prospect of a recession may complicate those effects. 

“To the degree current inflation is caused by supply shortages, new equipment could produce more goods faster. So it would slow price increases,” Howard Gleckman of the Urban-Brookings Tax Policy Center said in an email to The Hill. 

“But if we are headed for an economic slowdown, or even a recession, by the time the new equipment comes online demand for goods may slow. In that case, companies would have to pay off equipment (at high interest rates) that is not productive. That could prolong a slump,” he said.