Tax Analysts Blog

Economists of All Stripes Say Tax Cuts Will Increase the Deficit

Posted on Dec 14, 2017

Finally we’ve had time to review all the dynamic estimates now available on the pending tax legislation. The results are not surprising given what mainstream economists have been saying about the legislation’s effect on growth. But assembling the dynamic estimates in one spot (see below) creates a powerful impression. Given what these studies show, it is hard to disagree with James Pethokoukis of the American Enterprise Institute, who said on December 7, “Republicans shouldn’t expect tax cuts to pay for themselves. Or even come close.”

Summary of Recent Dynamic Estimates of Pending Tax Legislation

 

 

Estimate

 

Increase in Level (Not Growth Rate) of GDP

10-Year Revenue Estimate Including Dynamic Effects

JCT - Senate Bill Static

NA

-$1,412 billion

 

 

 

JCT - House Bill

0.7%*

-$1,008 billion

JCT - Senate Bill

0.8%*

-$1,007 billion

Tax Foundation - Senate (preliminary)

3.7%**

-$516 billion

Tax Policy Center - Senate

0.4%**

-$1,260 billion

Mathur-Kallen AEI - business provisions

0.5%**

n.a.

Penn Wharton - Senate  (low-growth estimate)

0.5%**

-$1,193 billion***

Penn Wharton – Senate (high-growth estimate)

1.0%**

-$971 billion***

* Average over 2018-2027 period

** At end of 2027 period

*** Penn Wharton’s dynamic estimate of change in revenue due to growth added to JCT static estimate.

Sources and notes:

Macroeconomic analysis of the Tax Cuts and Jobs Act as passed by the House on Nov. 16, 2017, Dec. 11, 2017, JCX-77-17; and macroeconomic analysis of the Tax Cuts and Jobs Act as ordered reported by the Senate Finance Committee on Nov. 16, 2017,” Joint Committee on Taxation, Nov. 30, 2017, JCX-66-17.

 “Special Report #240, Preliminary Details and Analysis of the Senate’s 2017 Tax Cuts and Jobs Act,” Tax Foundation, Nov. 10, 2017.

, “Macroeconomic Analysis of the Tax Cuts and Jobs Act as Passed by the Senate,” Benjamin R. Page, Joseph Rosenberg, James R. Nunns, Jeffrey Rohaly, Daniel Berger, Urban-Brookings Tax Policy Center, Dec. 11, 2017. Average GDP level of 0.4 percent computed by author from Table 1.

 “Tax Reform: Business Tax Reform, Investment and GDP: Potential Impacts of the Tax Cuts and Jobs Act,” Dec. 11, 2017, Benjamin R. Page, Joseph Rosenberg, James R. Nunns, Jeffrey Rohaly, Daniel Berger, American Enterprise Institute. For estimate show here, Mathur and Kallen measure only business provisions in Senate bill assuming 20 percent corporate rate, 31.8 percent passthrough rate, temporary expensing, and deficit financing of tax cut.

 “The Senate Tax Cuts and Jobs Act, as Passed by Senate (12/2/17): Static and Dynamic Effects on the Budget and the Economy,” Penn Wharton Budget Model. Dynamic estimate not directly from PWMB but estimated by this author from Penn Wharton’s dynamic estimate of change in revenue due to growth (in Table 2) added to JCT static Senate estimate. Dynamic “high” estimate is $441 billion (= $1,967 billion – $1,535 billion). Dynamic “low” estimate is $219 billion (= $1,976 billion - $1,757 billion).

 

 

 

Read Comments (3)

Travis RechDec 14, 2017

There is no mystery. Tax cuts can only pay for themselves through growth if taxes and spending were so high that it was crowding-out private investment, which is not the case today. Businesses and the wealthy already have so much surplus capital that they cannot find suitable ROI without very high risk, I'm not sure how giving them more capital would lead to greater investment.

Also, much of the supposed growth according to the Republicans will come from foreign investments as our lower corporate taxes will make us a more attractive place to park capital. Think about that. Foreign investment today equals foreign payments in the future. That isn't a net gain for the American citizenry. It is an effective stimulus for rich foreigners and foreign corporations, though.

Lastly, I suspect they are well aware of the deficit implications. Thats a feature, not a bug. All the deficit hawks will come out of the woodwork to demand raising social security age, freezing benefits, and slashing medicare. Granted, the loss in Alabama makes getting any of that to actually happen look a lot less realistic than before, but that is clearly the agenda, Paul Ryan said as much himself.

Mike55Dec 14, 2017

On your final point: I wouldn't worry too much, at least in the short term. My guess is that the next big Republican initiative will be immigration (or some other non-fiscal issue), and the entitlements you listed will have breathing room for the foreseeable future. No one is crazy enough to mess with entitlements before a midterm election, because only old people show up en masse for midterm elections.

Now if those midterm elections go poorly for Democrats, THAT will be the time for you to worry about entitlements. But for now just strap in for immigration reform (or something similar).

Mike55Dec 14, 2017

This is one of those subjects where the back-and-forth between the two parties is challenging for moderates to comprehend. The JCT has released a remarkably favorable dynamic score on both Republican tax plans; far better than most people (myself included) had anticipated. With the exception of the TPC, large/well-known think tanks have also issued impressive dynamic scores. In response the moderate thinks "well, looks like the Republicans have won this round."

Yet somehow that's not how it works at all! Republicans are hugely disappointed by these scores, even issuing their own rushed/sad/contrived competing one page document saying the growth is actually far larger. Meanwhile, Democrats are celebrating. I just don't get it... somehow trying to prove the disingenuous rhetoric ("tax cuts pay for themselves") has become more important than reality.

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