Today, however, let’s talk tax reform, or, as I like to call it, tax cuts. “Reform” to me would imply raising more revenue to deal with the budget challenges we face. Based on demographics alone, we will need more, not less, revenue as the share of the elderly population will grow from 15 percent to 21 percent over the next two decades. Reform would imply shutting down tax avoidance incentives, and certainly not opening new ones, as at least one Trump idea does (an earlier proposal to lower the “pass-through” rate to 15 percent creates a huge incentive for wage earners to arrange to be taxed as incorporated businesses).
So, I urge those writing about this topic to avoid the vague and inaccurate term “reform,” which in this and many other areas surely means something different to different readers.
Anyway, on Wednesday team Trump is supposedly going to announce what I suspect will be little more than broad guidelines for a tax plan, with details to follow. His budget director suggested they would trot out “some specific governing principles, some guidance, also some indication of what the rates are going to be” which will be lower than they are now.
If you’ve followed this debate, this all could sound pretty confusing, because candidate Trump had a tax plan, one that cut taxes by $6 trillion, of which a bit less than half ends up at the top of the income scale (along with the pass-through loophole noted above). But there’s been so much lurching on what’s in and what’s out, that at this point, no one seems to know what this plan will look like. I suspect that’s because there is no plan; you cannot overestimate the difficulty this administration is having getting its legislative act together.
But amid all these vagaries, here’s something of which I can assure you: They will use highly aggressive dynamic scoring to claim their plan will pay for itself.
When asked about the deficit impact of the tax plan, Mnuchin said at an International Monetary Fund event Saturday that when accounting for the economic growth that would occur because of the tax changes, the tax overhaul “will pay” for itself.
Not to put too fine a point on it, this is false. I haven’t even seen their tax cut, and I can assure that it will not pay for itself. Because no tax cuts do that. “Accounting for the economic growth” allegedly generated by a tax plan is called “dynamic scoring” and it is a practice that is ripe for abuse, which is why I’m trying to warn anyone who will listen about DSA, or dynamic scoring abuse: the practice of pretending that tax cuts generate so much growth that they offset their lost revenue.
There are good reasons to disbelieve the empirically phony claims you will soon be hearing:
—Reasonable dynamic scores show a range of impacts, none of which pay for their tax cuts. The Tax Policy Center is known for careful, state-of-the-art analysis, finds that one recent version of the Trump tax-cut plan lost $6.15 trillion in revenue over 10 years without dynamic scoring and between $5.97 or $6.03 trillion with it. For the record, I don’t believe these either, but at least I can understand the assumptions.
—The reason I don’t believe them is because I don’t think we (economists) can accurately even “get the sign right” on such estimates, meaning we can’t tell whether they’ll add to or subtract from growth. All we can know, based on history, is that they’ll be “small,” à la the Tax Policy Center effects just cited.
—How can this be? Isn’t it always the case that tax cuts boost growth? No! There’s no such correlation either across countries or across time. Team DSA argues, for example, that tax cuts will lead people to work harder, but economic theory is ambiguous on this point, as some people will maintain their same after-tax income while working less. And, of course, most people can’t tweak their work schedules like this anyway when the tax code changes.
—That’s microeconomics, but at the macro level, if the revenue loss means less investment in public goods, including both productivity-boosting physical and human capital, growth will be slower.
—Because of all this uncertainty, dynamic scoring, if done honestly, generates a wide range of estimates, depending on the different assumptions plugged into the model. For example, a dynamic score of a Republican tax plan from a few years ago by former Rep. Dave Camp estimated that it would raise the level of GDP over 10 years by between nothing (0.1 percent) and 1.6 percent.
—Now, guess which end of that spectrum fans of his plan would choose to highlight (see figure below)? Recall how Trump “dynamically scored” the crowd size at his inauguration or the popular vote count from the election. Given a range of dynamic scores, do you trust this team to give an honest answer? In fact, Mnuchin’s already teed up his answer: The tax cuts will pay for themselves.
No, they won’t. And when you hear claims to the contrary, you’ll now be ready to provide a quick, accurate diagnosis of DSA.