|This morning, the Senate opened debate on a budget reconciliation instruction to allow for a tax cut financed by a $1.5 trillion deficit over ten years. Senate Republicans are close to the 50-vote mark. A vote on final passage is expected this week. Trump wants badly to show he can close a major deal in 2017. Sen. McConnell to can wait until 2018, when midterm election voters are more likely to remember.
Does such a deficit of this order of magnitude matter to the voters? If Republicans don’t believe deficits matter, why pursue the economically embarrassing “dynamic scoring” canard to predict (aka hope for) a budget “surplus” that would require fantastical levels of economic growth to realize? A closer look at why below.
A Truly Dynamic Score
A truly dynamic score reflects both the positive and the negative impact of a given tax plan on economic growth. Nailing down the exact fiscal impact of the Republican tax framework is made difficult without defined tax brackets or details on deduction elimination, but we can get close. The Urban-Brookings Tax Policy Center (TPC) gives us an estimate that the tax plan will reduce federal revenues by $2.4 trillion in the first decade (and $3.2 trillion over the next ten years).
Kevin Hassett, chairman of Trump’s Council of Economic Advisors, attacked the TPC study, calling the Center’s findings “scientifically indefensible” and “a fiction.” The study is misleading, he says, because it unjustly minimizes the potential growth impact of President Trump’s tax plan. The claims are curious given Hassett’s rigorous economic training. Almost all other economists agree the dynamic impact of the tax plan is modest at best, damaging at worst.
What is the probable fiscal return on investment of these deficit-financed tax cuts? Will this return be enough to offset the negative fiscal impact as the administration claims?
Negligible Positive Growth Impact
The administration and many Republicans in Congress argue that the surge in growth unleashed by these tax cuts will be more than enough to offset these revenue losses. Treasury Secretary Mnuchin claims the plan will reduce the deficit by $1 trillion, a figure he now owns as the “Mnuchin Surplus.”
To substantiate these claims, the White House asserts hopes that reducing tax rates will encourage individuals and companies to invest in the United States and encourage entrepreneurialism on an unprecedented scale. Slashing individual and corporate rates, on this vision, will allow small-business to invest, modernize and pass profits through to workers via higher wages and benefits
Most economists find these claims dubious or “optimistic.” A 2014 Brookings study found that tax reform’s net impact on GDP growth is “either small or negative.” Bruce Bartlett, a domestic policy advisor for the Reagan administration, argued: “In reality, there’s no evidence that a tax cut now would spur growth.”
Economists at Goldman Sachs conclude that corporate shareholders are far more likely to benefit from the corporate rate reductions than workers in the short term, undermining the administration’s supply-side arguments in favor of corporate rate reduction. In the long term, wages might increase if small business formation accelerates and corporations actually make the productive investments.
There is scant basis for expecting such investment. The effective rate of corporate taxation has fallen substantially in the last several decades (from 36 percent in the late 1970s to slightly over 23 percent today) without any corresponding boost in investment or wage growth. Beyond this, deficit-financed tax cuts can put a drag on investment in the long run by increasing interest rates and crowding out the very investments the administration is relying will growth and increase tax revenue.
Substantial Fiscal Cost
What we know without doubt is that the Trump tax plan will have an immediate fiscal and therefore economic cost. TPC provides a standard static estimate of the various provisions of Republican tax plan, finding that the “business income-tax [passthrough] provisions” would reduce federal revenues by $2.6 trillion, the elimination of the estate tax would cost the government $240 billion, and restructuring individual tax brackets would increase revenues by approximately $470 billion. The interest expense to the Treasury could add upward of $2 trillion (not a typo) over ten years to the total.
Do the Math – The Wilbur Rate
Based on Secretary Ross’s declaration that administration policies could add $10 trillion to economic growth and generate $3 trillion in additional revenues, we should expect to see 58 percent economic growth over the next decade. Here’s the math: $10 trillion in additional GDP over ten years yields an Increased GDP from the current $17.01 trillion $27.01 trillion. $27.01 trillion divided by $17.01 trillion is 1.58. That equals a 58 percent economic growth rate. Without it, the the Mnuchin Surplus is a pipe-dream.
In the aggregate, back on the intellectual grid, Goldman analysts predict that the Trump tax plan will yield a 0.1 percent to 0.2 percent increase in growth rates during the first few years of the tax cut, with decreasing growth in subsequent years. This leads Goldman to conclude that dynamically scoring the proposal’s costs will be only about 20 percent lower than a static scoring, short of the $1 trillion “Mnuchin Surplus” and six percent growth rates touted by the administration, today.
Today’s Conditions: Tax Cuts Contraindicated
Republicans are estimating GDP growth figures are close to the spikes in growth witnessed towards the end of the Great Recession. Is it valid to predict that a 1.5 trillion tax cut would produce similar results this far into economic recovery?
This is a counterintuitive time to pursue deficit-financed policy of any kind. The contractionary conditions that would call for large tax cuts have subsided therefore such a move would be countercyclical. The Obama stimulus amounted to $840 billion, took place under the strain of an unemployment rate of 9.6 percent, and resulted in the creation of approximately 2.4 million jobs per year. The tax cut would be implemented as we have clawed out of those conditions with an unemployment rate hovers around 4.2 percent.
Proxy Fight in the Republican Civil War
Republicans make growth claims of the tax-plan-in-formation that are euphemistically called “optimistic.” The GOP effort to cloud over confusion among the troops about fiscal principles reversal of conservative principle on fiscal discipline in order to finance a tax cut. The tension in their ranks between fiscal discipline and the competing tax-cutting compulsion are nearing a boiling point just when the prospect of passing cherished tax reform is so close at hand.
The GOP is arguing in the alternative, advancing first that deficits don’t matter, and second that if they do, economic growth will more than make up for them fiscally. During the Obama era and even in the depths of recession, Republicans pledged allegiance to the cause of fiscal responsibility. Now that they are in power, they abandon the notion that deficits matter. Some holdover fiscal hawks, like Sen. Corker may well not go along with the present plan to increase the deficit by $1.5 trillion. Will the deficit hit be enough to move teetering Senators Paul, Flake, and Heller to voting no on the budget resolution expected later this week?