Douglas Holtz-Eakin is president of the American Action Forum and former director of the Congressional Budget Office from 2003 to 2005.
President Trump is correct to press for tax reform, correct to argue that corporate rates should be reduced and correct to look for policies that boost the United States’ anemic economic growth rate. But the “rough draft” of Trump’s tax plan, rolled out at the White House on Wednesday, falls short of being a real tax reform suitable to tax-cutting conservatives such as me.
Proposing trillions of dollars in tax cuts and then casually asserting that such a plan would “pay for itself with growth,” as Treasury Secretary Steven Mnuchin said, is detached from empirical reality. A real tax-reform plan would include specifics on how to broaden the tax base — not leave that hard work to Congress. A responsible tax plan would not ignore the threat of increasing a national debt that is already on an unsustainable course.
Accelerating the pace at which the federal budget bleeds red ink must be avoided, and building a tax plan based solely on the premise of future economic growth is dangerous. Sailing straight into a sovereign debt crisis is not a pro-growth strategy. What firm would want to headquarter in a country that is toying with financial meltdown accompanied by emergency austerity and tax hikes?
Of course, policymakers should factor economic growth into their tax-reform plans. Permanent, structural reforms — such as a territorial tax, neutral treatment of tangible and intangible capital, and others — could make it more desirable for companies to headquarter, innovate, invest and grow in the United States. This would be preferable to merely cutting tax rates in the existing failed system.
Typically, the Office of Management and Budget and the Congressional Budget Office analyze the economic growth potential of proposed policies through “dynamic scoring.” Every budget submitted by the Obama administration was dynamically scored. President Barack Obama was a dynamic scorer. President George W. Bush was a dynamic scorer. So were their predecessors.
But never has a dynamically scored analysis concluded that a proposal would “pay for itself with growth,” and no serious economist would make such a claim. At best, according to the prevailing consensus, the positive feedback effect from tax cuts would recoup in the range of 25 to 35 percent of the cost.
Consider, for example, the analysis done by the Joint Committee on Taxation on the tax-reform draft released by former Ways and Means Committee Chairman David Camp (R-Mich.). The plan, released in 2014, permanently lowered the corporate rate to 25 percent, included structural reforms and, importantly, was revenue neutral — it didn’t increase the deficit. This is precisely the type of reform that one would expect to have the largest impact, because of the drag on economic growth created by rising debt. Still, the JCT concluded that the growth feedbacks would only produce between $50 billion and $700 billion in additional revenue. That’s a far cry from the more than $2 trillion the treasury secretary would need to offset the costs of the latest plan.
More rapid economic growth is the central challenge in our economy, and tax reform is a powerful tool to improve the growth outlook. Real tax reform, however, takes on tough choices to broaden the base and is not built on implausible claims for the impact on growth. Congress has a rare opportunity to boost American competitiveness and productivity growth with a sensible tax-reform package. But that package must be built on realistic growth assumptions, not economic fairy tales.
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