I post expanded notes from my weekly radio show at Autos and Economics on blogspot.com. This week I was asked to comment on Trump’s tax proposals. That’s a moving target, so I shifted my focus to another theme of the Republican candidates: tax cuts will pay for themselves.
- Can you add graphs on what has happened to our structural budget deficit after previous tax cuts? – for example, those under Reagan, Bush Jr and Obama (yes, he passed a big cut as part of the ARRA, the American Recovery and Reinvestment Act of 2009).
- Similarly, can you set up a spreadsheet of base GDP growth versus a hypothetical tax-accelerated GDP growth rate [pick a non-trivial increment, say a bump from 2.5% to 3.0%, a 20 percent boost, greater in magnitude than the tax cut]. Do a net present value calculation of taxes!
- under the base plan (at say 20%) and
- those under the revised level (say 18%, or a 10 percent cut)?
- Now that faster growth won’t be immediate, if it’s a supply-side effect, right? So put in a delay, maybe a phase-in over 4 years.
- How long does it take for the combination of faster growth and lower taxes to generate more revenue than under the base case?
- How robust are those results to modest changes?
- if we add a demand-side effect, 3% growth from the start, how does it change our results?
- what growth is needed for net present value to be equal (at say a 3% discount rate to reflect the low rates anticipated in current long-term bond yields)
So far I’ve not tried doing this, so I suspect what we’ll find, but don’t know the result.
Table in association with comments:
5 Comments
Although tax cut theoretically incentivizes the economy and we could cut tax rates without sacrificing tax revenues, but through the spreadsheet posted in the post we can see that it takes a very long time (more than 20 years) to materialize. Since the effect takes way too long to realize, it is difficult to quantify the future benefits today. For a real life example, we can look at the Bush tax cut and see from the link posted below that it contributed to a historical decline in federal tax revenue:
“By 2004 federal tax revenue in proportion to the economy had fallen to its lowest level in almost fifty years.”
http://www.taxpolicycenter.org/briefing-book/background/bush-tax-cuts/revenue.cfm
Going along with Jier’s comment that the benefits of a tax cut appear after a long time, the growth rate would have to immediately increase to around 4.1% for the effect to be felt within the eight years that one of these candidates might serve as president. (holding everything else constant)
Thanks, the 4.1% calculation within 8 years is a neat way to phrase it!
Looking back at the original practitioner of large tax cuts, Reagan was also forced to eventually raise taxes again because of the swelling of the deficit. Reaganomics backers will point to the US recovery in the early eighties as evidence of growth caused by low taxes, but it’s difficult to discern what credit to give Paul Volcker and what to give Reagan without a counterfactual. Interestingly, Reagan also tried to shrink the size of the IRS when he was first in office but left with the IRS at new record in terms of size.
Reagan was indeed a pragmatic president, and a fiscal conservative — the Republican Party no longer is (hard to know with the Democrats since they have so little say in Congress). Of course the Republicans have proposed budget outlines that claim to restore a current balance, but only through the use of asterisks for “details to be provided later”, that is, hand-waving.
Now governments can easily commit to future obligations without providing funding [building a highway, with funds allocated in line with progress, or promising Social Security payments]. Likewise they could build that same bridge, and put all the money in a regional highway authority account up front. So unless you develop a thick book of budgeting rules, a “balanced” budget could be moved into surplus or deficit through such decisions over the timing of funding.
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