aside Do Tax Cuts Really Grow The Economy?

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTS
Treasury Secretary Steve Mnuchin

The republicans are introducing to the American tax payers a huge deficit exploding tax cut designed to benefit the wealthy with a little thrown in for the middle class to help sell it. This is the discredited good old Reagan “supply side” and “trickle down” economy. Without spending cuts, this tax cut will not grow the economy from 2% to 3% but it will grow the deficit. According to the economic news analyst Steve Rattner, it would take growth of 4.5% to pay for this tax cut.

This not tax reform. 

Snapshot of the republican President Donald Trump’s 4/26/17 tax reform proposal:

–individual rates 10, 25 and 35%
–childcare tax credit
–15% business rate (Instead of 35%) (Russia is at 20%)
-repeal death tax
-repeal AMT (Alternative Minimum Tax)
-repatriation (Moving monies from overseas back to the USA)

The other frequently used republican talking point, that tax cuts will grow the economy, is not a given outcome.

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTSHere is the rest of the story…

On 10/30/15, Danielle Kurtzleben of NPR penned the following analysis, “FACT CHECK: Do Tax Cuts Grow The Economy?”

“In a GOP debate, moderators pressed GOP candidates on their massive tax reform pans. Moderator John Harwood asked Donald Trump about the idea that his massive tax cuts would make the economy take off “like a rocket ship” (an idea that Trump staunchly defended).”

“Ted Cruz got at a similar idea, referencing the tax plan he unveiled: “(I)t costs, with dynamic scoring, less than $1 trillion. Those are the hard numbers. And every single income decile sees a double-digit increase in after-tax income. … Growth is the answer. And as Reagan demonstrated, if we cut taxes, we can bring back growth.”

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTS
U.S. House Speaker Paul Ryan/ President Donald Trump

The Big Question:

Does reducing taxes grow the economy?

The Long Answer:

“Tax cuts can boost economic growth. But the operative word there is “can.” It’s by no means an automatic or perfect relationship.”

“We know, we know. No one likes a fact check with a nonfirm answer. So let’s dig further into this idea.”

“There’s a simple logic behind the idea that cutting taxes boosts growth: Cutting taxes gives people more money to spend as they like, which can boost economic growth.”

“Many — but by no means all— economists believe there’s a relationship between cuts and growth. In a 2012 survey of top economists, the University of Chicago’s Booth School of Business found that 35 percent thought cutting taxes would boost economic growth. A roughly equal share, 35 percent, were uncertain. Only 8 percent disagreed or strongly disagreed.”

Related image“But in practice, it’s not always clear that tax cuts themselves automatically boost the economy, according to a recent study.”

“[I]t is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy,” as the Brookings Institution’s William Gale and Andrew Samwick wrote in a 2014 paper. Well-designed tax policy can increase growth, they wrote, but to do so, tax cuts have to come alongside spending cuts.”

“And even then, it can’t just be any spending cuts — it has to be cuts to “unproductive” spending.”

“I want to be clear — one can write down models where taxes generate big effects,” Gale told NPR. But models are not the real world, he added. “The empirical evidence is quite different from the modeling results, and the empirical evidence is much weaker.”

” According to a 2012 report from the nonpartisan Congressional Research Service (referenced by the NY Times‘ David Leonhardt in a 2012 column), top marginal tax rates and economic growth have not appeared correlated over the past 60 years.”

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTS“One other nuance — it depends on the type of tax cut. You can imagine how cutting taxes for lower earners might boost activity more than cutting the top marginal rate — lower-income Americans with an extra $100 are more likely to spend that money than a millionaire.”

“Likewise, the economic research firm Moody’s found in 2008 that temporary tax cuts (like rebates) could boost GDP, but permanent ones had a much weaker effect. Meanwhile, boosting spending on programs like food stamps and unemployment had a stronger effect, they found.”

“In short, if your sole, ultimate goal is faster growth, tax cuts might not be the best policy.”

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTSWhy It Matters, Part 1: What do these plans cost?

“This might seem like a stupid question — of course economic growth matters! — but it matters doubly for these tax plans because it affects how much they end up costing. And most of the Republicans’ plans look really, really expensive.”

“A lot of the conversation about revenue in this week’s debate focused on estimates from the Tax Foundation, a right-leaning tax policy think tank in Washington, D.C., that has scored many of the GOP candidates’ tax plans.”

“That group releases what are called static and dynamic scores. Dynamic scores are complicated: They take into account potential economic effects — for example, they assume that tax cuts can generate economic growth and therefore, revenue. Static scores are much simpler, ignoring those effects.”

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTS“And that’s a weakness of static scores — policies have effects. But dynamic scores involve the impossible task of predicting the future. A perfect dynamic score would be the best option, but no one knows how to do a perfect dynamic score. So dynamic scores are inherently uncertain as well, and there are a lot of ways to get them wrong.”

“To see this fight in action, look back to earlier this year, when the Congressional Budget Office, with a new GOP-appointed director, announced it would start issuing dynamic scores.”

“Or look at the Tax Foundation. Many (Gale included) say the group’s dynamic scores are too generous, making policies like tax cuts look cheaper than they are.”

“And here’s where the bottom line comes in — even if you do believe the Tax Foundation’s dynamic scores are way too generous, as of earlier this month, they found that one candidate (Rand Paul) comes out with a plan that won’t slash revenue, while most of the other candidates will cut it by more than $1 trillion over 10 years.”

“Trump’s plan, by this math, cuts revenue by $10 trillion over 10 years.”

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTS Part II: How do you pay for it?

“In that Chicago survey of economists, 71 percent either disagreed or strongly disagreed that tax cuts would lead to higher revenue in the next five years. Meanwhile, zero percent agreed that cutting taxes would raise revenue in the next five years.”

“(A tax cut) won’t pay for itself. You’re not going to cut taxes by a dollar and get a dollar back in revenue from the growth,” said Doug Holtz-Eakin, former director of the CBO.”

“In short, big revenue-cutting tax plans would have to come up with some big spending cuts. Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, uses Gov. Jeb Bush’s tax plan as an example.”

Image result for IMAGES OF REPUBLICANS INTRODUCING TAX CUTS“Gov. Bush’s tax cut is between $1 and $4 trillion,” Goldwein said. “He’s making his job that much harder when not only does he have to reduce the debt but also he’s got to pay for his tax cuts first.”

“Candidates are presenting their dream worlds of fiscal policy, he says — the way the U.S. would operate if they could get everything they wanted through Congress (which won’t happen).”

“Candidates tend to oversimplify the relationship between tax cuts and economic growth.”

Sources:

Tax Foundation scores of presidential candidates’ tax plans

Chicago Booth survey of economists, 2012

“Taxes and the Economy,” Congressional Research Service, 2012

Do Tax Cuts Lead to Economic Growth?” David Leonhardt, New York Times, Sept. 15, 2012

Assessing the Macro Economic Impact of Fiscal Stimulus 2008,” Moody’s

NPR interview with Alan Cole, Tax Foundation

NPR interview with Doug Holtz-Eakin, American Action Forum

NPR (Scott Horsley) interview with Roberton Williams, Tax Policy Center

Interview with William Gale, Brookings Institution

Interview with Marc Goldwein, Committee for a Responsible Federal Budget

4 comments

  1. They claim business will have more money to create jobs. Only problem with that theory is business is already sitting on lots of money and are not creating more jobs.

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