Another big lie being told by Trump and the Republicans is that their big tax cut will actually reduce the deficit and the federal debt. we’ve heard this song and dance routine before, it’s the old Laffer curve, but it should be spelled laugher because of its absurdity. But they’re still telling this joke without a punchline:
The tax cuts proposed by Republicans and the White House will stimulate enough economic growth to overcome expected deficits, Treasury Secretary Steven Mnuchin said Thursday.
“We think there will be $2 trillion of growth. So we think this tax plan will cut down the deficits by a trillion dollars. That’s a large number,” he said in an interview on Fox Business Network’s “Mornings with Maria.”
Even that math is laughable on its face. $2 trillion in growth would have to be taxed at 50% in order to generate $1 trillion in new federal revenue, but it would also have to overcome the loss of revenue that would result from keeping spending the same but lowering the tax rates. So even the math they’re offering is ridiculous. But it’s false anyway. The Center for a Responsible Federal Budget, a bipartisan organization whose board includes conservative budget hawks like Mitch Daniels, Tim Penny, Paul Volcker and David Stockman, says the exact opposite is true, that it will increase the debt by more than $2 trillion. And unlike Mnuchin, they’ve actually done a preliminary study to back it up rather than just randomly throwing out numbers that don’t add up.
Making many assumptions about the plan – including that the brackets apply to the same income as the Trump campaign’s plan, that its 25 percent pass-through rate contains guardrails so it only applies to active business income, and that the limit on interest makes up about half the revenue lost from expensing – we estimate the plan has about $5.8 trillion over a decade of gross tax cuts and would cost $2.2 trillion on net through 2027…
As is, the plan would add a substantial amount to federal debt, and it would be impossible to offset this amount solely through higher economic growth. As we’ve shown before, the economy is unlikely to grow at the 3 percent annual rate assumed by the Administration, and tax reform itself is unlikely to improve growth by more than a few decimal points. If anything, the added debt would slow growth over the longer term and further add to the cost of the tax plan.
This is the lie that Republicans always tell, that tax cuts will pay for themselves and they never do. That can only happen if the cut spur massive economic growth, which just isn’t going to happen when all they’re doing is reducing them by a small amount. In the 1950s, when they were cutting tax rates in half? Maybe. But cutting the top rate from 39 to 25% just isn’t going to do anything but make the bank accounts of rich people a little bit fatter. Bruce Bartlett, an economic adviser to Republican presidents who helped sell this idea under Reagan, has now gone in the opposite direction and notes the history:
Today, Republicans extol the virtues of lowering marginal tax rates, citing as their model the Tax Reform Act of 1986, which lowered the top individual income tax rate to just 28 percent from 50 percent, and the corporate tax rate to 34 percent from 46 percent. What follows, they say, would be an economic boon. Indeed, textbook tax theory says that lowering marginal tax rates while holding revenue constant unambiguously raises growth.
But there is no evidence showing a boost in growth from the 1986 act. The economy remained on the same track, with huge stock market crashes — 1987’s “Black Monday,” 1989’s Friday the 13th “mini-crash” and a recession beginning in 1990. Real wages fell…
The flip-side of tax cut mythology is the notion that tax increases are an economic disaster — the reason, in theory, every Republican in Congress voted against the tax increase proposed by Bill Clinton in 1993. Yet the 1990s was the most prosperous decade in recent memory. At 37.3 percent, aggregate real GDP growth in the 1990s exceeded that in the 1980s.
Despite huge tax cuts almost annually during the George W. Bush administration that cost the Treasury trillions in revenue, according to the Congressional Budget Office, growth collapsed in the first decade of the 2000s. Real GDP rose just 19.5 percent, well below its ’90s rate.
We saw another test of the Republican tax myth in 2013, after President Barack Obama allowed some of the Bush tax cuts to expire, raising the top income tax rate to its current 39.6 percent from 35 percent. The economy grew nicely afterward and the stock market has boomed — up around 10,000 points over the past five years.
But as I’ve noted before, this is the only economic plan that Republicans ever have to offer. It’s the solution to everything, in their minds. If the economy is in the dumps, just cut taxes and it’ll come roaring to life (never mind that the evidence flatly contradicts that claim). If the economy is booming, revenue is high so we can lower the rates. And yet what happens under every Republican president? The deficits get bigger and the debt goes higher, and at a significantly higher rate than under Democrats.
Now, part of that is because Congress controls the budget, not the president, but history shows that it doesn’t actually matter who is in charge of Congress. And even those Republicans who are reputed to have been advocates of smaller government and lower spending, Ronald Reagan in particular, actually proposed higher budgets than the Democratic-controlled Congress approved during his time in office.
And part of it is also because tax rates are only one small factor in influencing the economy, and not the biggest by a longshot. Monetary policy by the Fed is a far more important factor than fiscal and tax policy, but so are a million independent decisions by corporations and industries that public policy has little effect on, especially in the short term.