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Tax Cuts’ Link to Economic Growth Is ‘Proven,’ Trump Claims

Posted on October 18, 2017 by Jonathan Curry

Invoking former President Ronald Reagan, President Trump cast himself in an October 17 speech as a modern-day version of the conservative icon — one with a vision to deliver the largest tax cut in history.

“Reagan cut taxes to unleash the economic miracle of the 1980s,” Trump said in remarks to the conservative Heritage Foundation, adding, “Lower taxes mean bigger paychecks, more jobs, and stronger growth.”

At its core, the Republicans’ tax reform framework is about providing American workers with a pay raise, Trump continued. He highlighted several elements of the framework that he said would do that, including proposals to nearly double the standard deduction, simplify the tax code, and increase the child tax credit.

He also touted an October 16 analysis by the White House Council of Economic Advisers (CEA), which estimated that the average American household could see an increase in annual wages of between $4,000 and $9,000 just by lowering the statutory corporate tax rate to 20 percent. But in his speech, Trump attributed the $4,000 figure to a combination of lowering the corporate rate and repatriation of foreign corporate profits.

Trump said the business tax cuts proposed in his plan would heal the “giant, self-inflicted economic wound” caused by the current tax system, arguing that the desired 20 percent corporate tax rate would be “way below our average competition out there.” He also joked that the framework’s inclusion of temporary, five-year full expensing “makes me want to go immediately back into business.”

The president concluded his remarks by calling on the Heritage Foundation to lend its support to the tax reform effort. “The Heritage Foundation can once again help make history by helping to take this incredible idea — this proven idea — this tax cut, and making it a reality for millions and millions of patriotic Americans,” Trump said.

“Let’s give our country the best Christmas present of all: massive tax relief,” he added.

Facts and Figures

According to a White House fact sheet released to coincide with Trump’s speech, major tax cuts by previous presidents — specifically George W. Bush, Reagan, and John F. Kennedy — have historically been followed by major periods of job growth.

However, some economists believe that link is tenuous at best. Diane Lim, an economist with The Conference Board, told Tax Analysts that the economic boon in the 1990s during the Clinton administration, when marginal tax rates were increased, presents a conundrum for supply-siders.

“Opponents of the Clinton tax plan claimed as well back then that the economy would implode and the stock market would tank.  But instead the economy grew strongly, and the economic gains were more widely distributed than had been the case in prior eras of strong aggregate economic growth,” she said.

The historic job growth numbers cited by the White House “are not numbers that the tax cuts can solely claim credit for,” Lim said. “Let’s not forget that without any change in fiscal policy, the economy tends to grow over time, and jobs tend to increase over time, just because of population growth. One could attribute that growth and those jobs to anything that happened to happen over those time periods,” she explained.

Chye-Ching Huang of the Center on Budget and Policy Priorities (CBPP) likewise told Tax Analysts that the White House appeared to “cherry-pick the economic performance following a few tax cuts while providing no comparison with how the economy typically performs when policymakers don’t cut taxes or even raise them.”

In particular, she cited a CBPP analysis that compared real per-person economic growth between the periods following the 1981 Reagan tax cuts and the tax increases in the 1990s, which found that there was little difference in per-person growth, but nearly double the real per-person revenues in the 1990s.

“This suggests that the Reagan tax cuts were far more effective at reducing government revenue than they were at growing the economy,” she said.

However, in a September 2011 report, Curtis S. Dubay of the Heritage Foundation contended that the period of strong economic growth in the 1990s often attributed to President Clinton’s domestic policies didn’t really take off until after Clinton reluctantly signed a tax cutting package into law in 1997.

Similarly, Dubay rejected claims by some critics that President George W. Bush’s tax cuts did little to help the economy, writing that because the 2001 tax cuts were phased in, their economic effect was delayed.

In a briefing with reporters previewing Trump’s speech earlier in the day, a senior White House official acknowledged that the administration’s claims about the historic link between tax cuts and job creation and economic growth are in dispute. But the official defended the claims, saying, “None of this stuff happens in a vacuum. . . . There are a lot of different economic factors that play into what the economy does.”

By cutting back regulations in addition to pursuing tax reform, Trump is taking a “holistic approach to the economy and doing everything he can to . . . put rocket fuel into the economy,” the official said.

The official also said that the notion that the Republicans’ proposed tax cuts will mostly benefit wealthy Americans is “so tired . . . it’s just nonsense.”

CEA Skeptics Atwitter

Tax policy economists took to Twitter October 17 to question the day-old CEA report asserting that the framework’s corporate tax changes would yield dramatic increases in average and median household income growth.

Mihir A. Desai of Harvard University’s business and law schools chafed at the CEA’s citation of a 2007 research paper on corporate tax incidence that he coauthored. “Recent @CEA report on corporate tax cuts misinterprets results of our (Desai Foley Hines) paper on corporate tax incidence,” Desai posted on Twitter, adding that the CEA report authors “have 400% of corporate tax cuts going to wages - so v. little relation to estimates in paper with 60% of cuts going to labor.” What 400 percent figure Desai attributed to the CEA report was unclear. He did not respond to a request for comment.

CEA Chair Kevin Hassett’s immediate predecessor, Jason Furman of the Harvard Kennedy School of Government, noted Desai’s gripe. Furman also tweeted critically of the CEA report as well as one coauthored by Boston University economics professor Laurence Kotlikoff, which the office of House Speaker Paul D. Ryan, R-Wis., touted as confirmation of the CEA’s wage growth projections.

“I would argue TPC filled in missing details in a plausible manner,” Furman posted on Twitter, referring to an initial Urban-Brookings Tax Policy Center analysis of the framework that Hassett derided. “@Kotlikoff et al appear to directly contradict the details that are there” in the framework. Furman noted that Kotlikoff and company’s paper “assumes tax cuts paid by lump sum increases & permanent expensing for structures.”

Furman also quoted from Kotlikoff’s paper: “We share the TPC’s concern that the [framework] plan could disproportionately benefit the top 1 percent” of income-earners.

Luca Gattoni-Celli contributed to this article.

Follow Jonathan Curry (jtcurry005) on Twitter for real-time updates.