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Trump, in new tax plan, promises to do what Reagan couldn’t

The Trump administration unveiled their proposal to overhaul the tax code on April 26, outlining sharply lower tax rates but fewer tax breaks. (Video: Jenny Starrs/The Washington Post, Photo: Jabin Botsford/The Washington Post)

At the center of President Trump’s plan to significantly cut taxes on businesses and individuals is a promise to stimulate extraordinary economic growth, so much so, his advisers say, that the plan would pay for itself.

If he succeeds in keeping that promise, Trump will have accomplished something his tax-cutting Republican predecessors were unable to do, say economists and tax policy experts from both parties.

In describing the proposal Wednesday, Trump’s top economic advisers said it would unleash new investment and spending by American companies and consumers, supercharging economic growth. That growth, in turn, would prevent the plan from leaving the federal government short trillions of dollars in tax revenue.

But in the experience of two other Republican presidents, Ronald Reagan and George W. Bush, tax cuts produced an uneven record of prompting economic growth. And in both instances, reductions in taxes were unable to pay for themselves, instead leaving the nation to deal with increasing federal debt.

After his 1981 tax cut, Reagan was forced to raise taxes several times. And Bush’s tax cuts put the nation on vulnerable fiscal footing, depriving the government of revenue as the United States waged two wars and faced a financial crisis. Ultimately, Congress and President Barack Obama, after several standoffs over federal finances, increased taxes by billions of dollars and imposed strict limits on government spending.

Economists fear it will happen again. “This is definitely not in pays-for-itself territory,” Alan Cole, an economist at the conservative Tax Foundation, said of Trump’s plan.

At the White House on Wednesday, Trump’s advisers touted the cuts as the start of an economic renaissance, recommitting to promises that their proposed tax regimen would both grow the economy and cut the debt.

“This tax reform package is about growing the economy, creating jobs. It’s about the economy,” Gary Cohn, director of Trump’s National Economic Council, told reporters. “That’s how we’re looking at this plan.”

Treasury Secretary Steven Mnuchin said the plan would curb the debt. “The economic plan under Trump will grow the economy and will create massive amounts of revenue, trillions of dollars in additional revenue,” he said.

Trump’s tax guidelines diverge from an effort by congressional Republicans, led by House Speaker Paul D. Ryan (R-Wis.), to craft a plan that aims to cut rates while keeping the government’s total tax revenue level, as the reductions would be balanced out by new taxes elsewhere and the elimination of loopholes.

For Trump, the attraction of his strategy is that it allows his administration to avoid proposing massive spending cuts or offsetting tax increases to keep the debt in check. And indeed, even the modest proposals he is making to raise some funding — such as limiting tax deductions to offset state and local taxes — promise to be controversial as he attempts to enlist Congress in support of his plans.

But while Trump says his tax plan is part of a broader agenda that will validate his campaign promises of producing economic growth not seen for decades, economists remain skeptical.

After reviewing the tax policy outline the Trump administration released Wednesday, several said that they hope Republicans can craft a plan that would have modest benefits for the economy, but few expected that Trump would be able to deliver the level of growth he has promised.

“The evidence shows clearly that no feasible tax reform in this country will raise economic growth to 3 percent on a sustained basis, given our current demographics,” said Doug Elmendorf, former director of the Congressional Budget Office.

As Trump attempts to succeed where Reagan stumbled, he’ll deal with multiple hurdles the former president didn’t, argued Douglas Holtz-Eakin, a conservative economist and former adviser in the Bush White House.

When Reagan reduced rates, he cut the maximum marginal rate on ordinary income for individual taxpayers from 70 percent to 50 percent. That rate currently sits at 39.6 percent, and cutting it further is unlikely to have the same on-the-ground effect on taxpayers’ decisions, Holtz-Eakin said.

Further reductions in rates are “just not going to have as big an impact as some of those early, dramatic fixes did,” he said.

Reagan, Elmendorf said, benefited from women’s entry into the workforce, which accelerated economic growth. Now, as the baby-boomer generation hits retirement, the labor force is shrinking, limiting the prospects for the economy.

Trump is also coming into office facing far more debt. According to the Congressional Budget Office, the U.S. public debt is now the equivalent of 77 percent of the gross domestic product, a level that is more than double the rate faced by Bush or Reagan.

That worries fiscal conservatives. “I don’t want to run some fiscal-policy experiment with the largest, most important economy on the planet. I mean, we’re not Belgium,” said James Pethokoukis, an economic commentator at the conservative American Enterprise Institute. “I would urge caution.”

Trump will be attempting to cut taxes in a more difficult environment than either Bush or Reagan, but even those two presidents’ policies had mixed results. Economists debate how successful they were in stimulating the economy, but nearly all agree that the cuts ultimately added to the debt as they failed to pay for themselves.

During the Bush administration, two rounds of large-scale tax cuts, in 2001 and in 2003, were followed by an economy that stagnated and then cratered amid the financial crisis of 2008. The economy grew at an average rate of 2.1 percent annually during Bush's eight years in office, although it was also held back by non-tax factors — including the attacks of Sept. 11, 2001, and the ensuing economic aftershock.

Reagan experienced far more economic success. When he cut rates in 1981, the economy was beginning to recover from a tumultuous decade of unemployment and inflation. By 1984, however, GDP expanded at an annual rate of 7.3 percent, an extraordinary figure. The expansion continued for the remainder of Reagan’s term, but in no year since 1984 has GDP growth reached even 5 percent annually.

Economists, however, debate how much of the boom was a result of Reagan’s tax policies and how much was a result of the actions of the Federal Reserve and other economic forces outside of the president’s direct control.

Reagan’s policies marked an inflection in the national debt, which had been declining rapidly and was near just 25 percent of GDP when Reagan took office. The debt reached 39 percent of GDP by the end of his presidency — in part a consequence of increased spending on the military.

Despite recent history, members of Trump’s camp say Trump will deliver on his promises.

“When you think about that cutting that corporate rate, let’s say, from 35 to 15, that’s not going to cost you any money,” said Arthur Laffer, an economist who advised Trump’s campaign and is among the most prominent advocates of reducing rates. “There are not going to be any revenue losses there.”

“This isn’t going to be easy. Doing big things never is,” Cohn said Wednesday. “We will be attacked from the left and attacked from the right, but one thing is certain: I would never, ever bet against this president. He will get this done for the American people.”

Outside his circle, however, Trump faces skepticism. Democrats are already lining up against the plan. And while Ryan on Wednesday praised Trump’s plan as a positive step, George Callas, the speaker’s senior counsel for tax issues, warned against a temporary reduction in the corporate rate.

“It would not alter business decisions. It would not cause anyone to build a factory,” Callas said last week. “It would just be dropping cash out of helicopters on corporate headquarters for a couple of years.”