The drive for tax cuts obscures the greater benefit of tax reform and simplification. Taxes, however, are only a single component of friction costs. If the purpose of tax reform or tax cuts is to stimulate investment and productive activity then it can not be isolated from other friction costs. If taxes are cut but regulations are increased then the expected benefits are muted. Taxes and regulations are only two of the friction costs. The real cost of capital which is dependent on Fed policy and debt is also critical. Trade policy can open and close markets for raw materials and finished products. A litigious culture plagues some industries more than others.
The dynamics of the tax cuts also matters: What taxes are cut? By how much?
One friction cost that is commonly overlooked is uncertainty. Uncertainty is different from risk. When the rules are known the investor can make rational decisions about risk. When the dealer can randomly change the value of an ace, the black jack table will become vacant.
Kevin Williamson addresses the very real cost of this uncertainty in Regime Change in National Review:
One of the basic problems here — perhaps unexpectedly — is the national debt and the deficits that contribute to it. The debt presents straightforward problems: Keep running up the debt and eventually debt-service payments become so crushing that the federal government has no money left for anything else. But there are other problems related to the national debt, problems rooted in earlier efforts to reduce the deficit. Because of the way our budget rules now work, tax cuts passed by Congress frequently are temporary. They have sunset provisions, and have to be renewed. Hence all that endless talk a few years ago about “renewing the Bush tax cuts,” which eventually became the Obama tax cuts. The Byrd Rule, which is part of the 1974 Budget Control Act, allows senators to block bills being passed through the reconciliation process if those bills would add to the deficit over a ten-year budgetary horizon. Hence, lots of tax cuts expire in ten years. It doesn’t do any good, really — it’s just a way to keep statutory spending controls from doing their jobs.
There is not going to be any certainty on the big domestic-policy items — taxes, health care, the entitlements, and much else — until there is a reasonable, sober, sustainable settlement on our national fiscal challenge. So long as the charade of ten-year sunsets and CBO-satisfying accounting shenanigans rule the day, there is not going to be any predictability — and that is going to impose real costs on economic growth, employment, wages, and future prosperity.