As we come up on the celebration of Donald Trump’s 100 Days of Winning, the administration is turning its attention to the policy goal that lies closest to the heart of every Republican: tax cuts.
Republicans would like to completely overhaul the tax system, but that presents a difficult legislative challenge if they’re to devise a plan all of them can live with. There are divisions on questions like whether to impose a border adjustment tax on imported goods. But they also face a political challenge in making the case for their plan to the public, particularly if comprehensive reform proves too difficult and they default to what all Republicans can agree on, namely cutting taxes for the wealthy and corporations.
There are multiple grounds on which Democrats will attack any such plan, the most important of which is that it would be a giveaway to those who need help the least. Democrats will also say, “You just spent eight years saying we had to cut the deficit, and now you’re going to hugely increase the deficit with this tax cut!” But every faithful supply-sider knows the answer to that argument: The Tax Fairy.
What is the Tax Fairy? I’ll let Secretary of the Treasury Steven Mnuchin explain:
The Trump administration plans to rely on controversial assumptions about economic growth to offset steep cuts to business and individual tax rates, a chief architect of the plan said Thursday.
Treasury Secretary Steven Mnuchin said the economic growth that would result from the proposed tax cuts would be so extreme – close to $2 trillion over 10 years – that it would come close to recouping all of the lost revenue from the dramatic rate reductions. Some other new revenue would come from eliminating certain tax breaks, although he would not specify which ones.
“The plan will pay for itself with growth,” Mnuchin said at an event hosted by the Institute of International Finance.
The Tax Fairy uses her magical powers to make tax cuts for the rich good for everyone. You see, in ordinary circumstances, wealthy people mope through their days in a state of deep malaise, trudging back and forth from their Wall Street offices to their houses in the Hamptons, dreaming of all they could accomplish for their fellow Americans if only their marginal tax rates would be reduced. Once we give them that much-needed tax break, they’ll be like Popeye ingesting a can of economic spinach. The ensuing explosion of economic growth will not only bring prosperity trickling down to all Americans; so much new activity will take place that government revenues will actually rise. The tax cuts will pay for themselves.
What’s remarkable about this story is that Republicans keep telling it, even after it gets disproved again and again — as does its inverse, that if you increase taxes on the rich, calamity is sure to follow. That’s why Republicans said in 1993 that Bill Clinton’s high-end tax increases would cause a “job-killing recession,” yet what we got instead was one of the longest periods of sustained growth in American history, with around 23 million jobs created during his presidency. Then in 2001, Republicans told us that once George W. Bush cut taxes, the resulting economic supernova would be so extraordinary that the only question we’d all be asking ourselves was whether we wanted to buy a Porsche or a BMW. What ensued was anemic growth, large increases in the deficit, and then the greatest economic crisis since the Great Depression. And now, they’re arguing that what is essentially a duplication of the Bush program — tax cuts plus cutting regulations on corporations — will produce the opposite result.
The point isn’t that tax increases help the economy and tax cuts hurt it, but rather that tweaking the tax code has very little effect at all. You might get a modest economic bump from tax cuts, but it won’t ever create enough growth to pay for them, as Republicans always insist their next tax cut will do. Democratic economists know this, which is why they don’t think changing the tax code — even in a progressive direction — is a particularly urgent priority. Many Republican economists admit it, too. Harvard’s Greg Mankiw, who chaired the Council of Economic Advisers under George W. Bush, famously called believers in the Tax Fairy “charlatans and cranks.”
In 2015, Republicans in Congress tried to institutionalize the Tax Fairy by ordering the Congressional Budget Office to use “dynamic scoring” when assessing tax bills. To do this, the CBO would have to determine what a tax cut will cost, but then subtract the effects of the ensuing boost of growth. This would have the effect of making tax cuts look somewhat less expensive than they are. But since the CBO is a non-partisan office with people trying to do their jobs with some degree of integrity, it won’t ever go far enough to give Republicans the answer they’re really looking for.
That’s not to mention the fact that, as Paul Krugman pointed out at the time, Republicans insist that we should use dynamic scoring to account for the alleged growth-prodding effect of tax cuts, but don’t want to account for the same effects that could be attributed to government spending. They would like us to believe that giving wealthy people a tax cut will boost economic growth, but giving poor and middle-class people health insurance, for instance — which in addition to the health benefits can stabilize their finances and enable to them start new businesses — will have no such effect.
We don’t know what the eventual GOP tax plan will look like, but here’s what will happen when it finally gets unveiled. The CBO will score it as increasing the deficit enormously. Republicans will complain that the CBO doesn’t know what it’s talking about, because it hasn’t sufficiently accounted for all the magic dust pouring from the Tax Fairy’s wand. Democrats will shout that it’s a huge gift to the rich, which it almost certainly will be. And Republicans will be unbowed, firm in their faith that nothing matters more than giving those noble job creators relief from the terrible burden of taxation under which they suffer.
When they start making these arguments, there’s one question I’d like to see them asked: “This is essentially George W. Bush’s program. If it didn’t work then, why is it going to work now?” If they come up with an answer more persuasive than “Because of the Tax Fairy,” I’ll be surprised.