Picture: 123RF
Picture: 123RF

Et tu, John McCain? Like most Democrats and more than a few Republicans I know, I had been hoping that the conservative senator from Arizona would hold out and vote against the ill-advised Republican tax plan.

He caved, and nearly everyone who was on the fence followed. I never thought I’d find myself praising Bob Corker, the only Republican to cross party lines and vote against the plan with all the Democratic senators. But the current political milieu is defined by the unexpected.

Corker’s own proposed tweak to the bill, a "trigger" provision that would roll back tax cuts if they failed to create the sort of revenue growth that Republicans promised, was what in poker terms is known as a "tell". Even Republicans don’t believe their own story about trickle-down tax cuts creating growth.

President Donald Trump, desperate to deflect attention from Michael Flynn and the threats that his guilty plea creates for the administration, has touted the Senate vote on Friday as a victory for "the biggest tax bill and tax cuts in history". But if the legislation ultimately passes, it will create a fiscal mess that America will be digging itself out of for the next 30 years.

The Republican plan can only be described as a Bizarro version of Reaganomics — all the downside (meaning a huge deficit increase, according to a variety of sources, including Congress’s own tax watchdog) with none of the upside of growth. Tax cuts have not created real economic growth in America in 20 years, under either Democratic or Republican administrations. Yes, we saw growth from tax cuts during the Ronald Reagan era, but we also saw a huge increase in the deficit in the second term. And the growth will not be repeated this time around since a variety of big factors, from demographics to productivity levels, are quite different now.

What we will see is an increase in wealth inequality, since it is very clear that any money that large corporations (the main beneficiaries of the Republican plan) get from the cuts will go straight into stock buybacks. This will add another dose of financial glucose to what is already a very saccharine market — one that is by almost any measure totally divorced from the reality of most people’s lives.

This is not only what multinational companies have done historically with big tax breaks — witness the overseas cash hoard that came back into the country following the 2004 repatriation cuts and went straight into buybacks. It is also what many CEOs themselves are indicating now.

Why should they do anything different with the cash, when US investment will be predicated, as it always has been, on US demand, which is flat? Not only is wage growth anaemic, but the average American has not had a serious wage rise in 20 years, under any administration. There is little reason to think that will change now. Productivity and demographics are also flat. Corporate tax cuts have not been tied to any quid pro quos that would encourage real economic investment rather than the further inflation of markets.

Meanwhile, we are nearly into the 10th year of an economic recovery cycle, which is about how long such things tend to last. Any further asset inflation caused by the tax cuts would only add impetus for an overdue interest rate rise (although I’m less confident about data-driven decision making and independence at the Federal Reserve now that Janet Yellen is going). That could prompt the correction that we all know is coming. It would also, of course, make debt more expensive for ordinary people. We are already seeing increased defaults in areas such as car loans and student debt. This is all economic Kryptonite for the majority of Americans, who do not hold most of their wealth in stocks.

Polls have shown that only a third of Americans support a tax cut. Most people believe, correctly, that it will mainly benefit the wealthy. So, will we see some kind of big electoral shift because of this? This is unlikely to happen in time for the 2018 midterm elections. The harm from the tax cuts probably will not be felt by then. Indeed, Trump will probably be able to keep taking undeserved credit for the asset bubble that has been inflated by the Fed.

In any case, American politics has become totally tribal. Even things as serious as potential proof from Flynn that the White House was colluding with Russia only elicits outraged protests from Trump supporters about nefarious Democratic plots to bring down the president. One Washington hand I spoke to last week told me about driving through a particularly crimson part of a red (Republican) state recently and seeing a sign that read, "Jesus was falsely accused, too."

In fact, believing that the Republican tax plan will create real growth and jobs in America is a bit like believing in immaculate conception. There is no proof, so, at this point, you just have to take it on faith.

My question for conservatives, particularly some of the seemingly principled ones who voted for the most bogus and politically cynical tax plan in recent memory, is this: when consumer spending accounts for 70% of the US economy, if people don’t get a raise, the maths will eventually stop working. What will you tell your constituents when it does?

© The Financial Times Limited 2017

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