Finally, the law eliminates most tax shelters, thereby yanking the rug from under the tangible assets on which they are based. Once again, this action will contribute to economic efficiency in the long run, but its timing couldn't be worse. At present, the situation in many tangibles is extremely precarious: Office space nationwide is grossly overbuilt and many markets are due for a correction; energy prices are weak and many oil- and gas-related businesses have been hanging on by their fingernails since last spring; prices of other industrial commodities are, in inflation-adjusted terms, down some 25% in two years; finally, agriculture is depressed and farmland prices in many states have collapsed. These areas will suffer greatly even in a relatively mild recession; an adverse tax law change adding to their troubles at the same time may ruin many tangible asset holders and their creditors, touching off a series of financial disasters.
My ultimate concern is not that the tax law changes will precipitate a recession that will be potentially open-ended on the downside--the risk of this happening was already uncomfortably high when the tax bill was passed. My concern is that any recession in the near term, regardless of its origin, will be blamed on the new tax law. This could well discredit its basic goal--longer-run neutrality of the tax system. Congress, especially in a deep recessionary setting, might try to help out various sectors and use tax policy to channel funds into them. We could be back in the old rut before the new tax system ever gets a fair road test.
Does this mean that the whole effort wasn't worth it? I think it was, even with the wretched timing of the short-term negative effects of tax law changes.
Another opportunity to considerably reduce the role of the tax system in allocating resources and to move toward increased efficiency of the economy through greater reliance on market forces might not come again for many years.