Treasury Secretary Steven Mnuchin repeatedly and misleadingly argues that the tax cut — which some budget analysts think will cut revenue by more than $5 trillion over 10 years — will pay for itself. This is a massive sprinkling of the old supply-side, trickle-down fairy dust that very few budget wonks will endorse, regardless of their political stripes.
That’s the point of this useful article by The Washington Post’s Max Ehrenfreund. He quotes former Congressional Budget Office director Doug Elmendorf, pushing back on the Trump administration’s claim that this or any other tax cut will raise the growth rate by half (from 2 percent to 3 percent):
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.
What does Elmendorf mean by that? The following table from CBO shows potential growth rates. These are the rates you’d expect, at full employment, of real GDP and its two additive components, labor force and productivity growth. A full 70 percent of the decline in potential growth (-1%/-1.4%) is explained by the slowing of labor force growth.
That’s largely a function of our aging demographics, which are, of course, insensitive to tax cuts. And this fact — the share of people over age 65 is expected to increase from 15 percent to 21 percent over the next 20 years — is highly germane regarding Trump’s tax plan. Aging demographics not only have negative growth implications but also mean we’re going to need more, not less, revenue in the future.
The administration would argue that the growth channel comes instead through the productivity line in the table. That’s the supply-side shtick: Lower corporate taxes, and you’d get more investment and more capital spending, and that would boost productivity growth. That’s not a crazy chain of events at all, but you’ve got to look at the evidence. The historical record finds little correlation between tax changes and investment or productivity, as Ben Spielberg and I show here and here.
Economists disagree on both the existence and the magnitude of these correlations. But even a strong supporter of corporate tax reductions, such as Doug Holtz-Eakin, also a former CBO director, argues that “[p]roposing trillions of dollars in tax cuts and then casually asserting that such a plan would ‘pay for itself with growth,’ as Mnuchin said, is detached from empirical reality.”
In that regard, Mnuchin’s quote in a Wall Street Journal article on Wednesday was revealing:
We’ve been hearing from the last administration that 3% is hard to get to and they couldn’t get there. That’s why we got a new president. If they had been at 3%, maybe there would have been a different outcome.
First, the president doesn’t set the growth rate. Not even the Federal Reserve does that, though that would be a bit closer to reality. Yes, when the stars align, policy can add or subtract from growth. Countercyclical government spending in recessions or investments in physical (infrastructure) or human capital (education) can boost growth. Conversely, austerity measures and disinvestment in public goods can harm growth. But we’re talking basis points (hundredths of a percent), not percentage points.
Second, while I promise not to wade into the morass of political punditry, I suspect Hillary Clinton did not lose the presidential election because of GDP growth, or at least not that alone. It’s the distribution of GDP that matters to many swing voters that determined the outcome of the election. When most GDP growth goes to the top few percent, faster GDP growth is not a sufficient solution to what ails those left behind. (Obviously I’m putting aside all the other issues in play: race, immigration, etc.) That’s also germane to this tax cut because it would significantly exacerbate our already-too-high levels of income inequality.
The Upshot’s Neil Irwin comes at this point from changes in the plan that would benefit the president himself and his family:
It is striking how many … affect the president and his family. He is a high-income earner. He receives income from 564 business entities, according to his financial disclosure form, and could take advantage of the low rate on “pass-through” companies. According to his leaked 2005 tax return, he paid an extra $31 million because of the alternative minimum tax that he seeks to eliminate. And his heirs could eventually enjoy his enormous assets tax-free.
I’ll tell you something else that’s striking, or at least used to be before I became inured to it: the extent to which Trump continues to push policies that totally disregard the working-class people who helped him get elected. First it was a health-care plan that kicked 24 million off the insurance rolls. Now it’s a tax cut that delivers almost all its goodies to the nation’s wealthiest households. The best I can say is that the press is doing a good job of exposing these hypocrisies.