Republicans in Congress released a “Unified Framework” tax plan last month which calls for reducing the corporate income tax rate to 20 percent from 35 percent and setting a lower rate for small businesses, as well as cutting taxes for individuals and allowing larger deductions for families.
Democrats have responded to it by saying it is a boon to the rich and to corporate America that would cause the federal deficit to skyrocket and add to the $20 trillion U.S. national debt.
Speaker Paul Ryan at an event hosted by Reuters last week metaphorically referred to one of his favorite activities, white-water rafting, to describe how the tax overhaul effort is entering its toughest phase in terms of getting passed in Congress.
“We’ve been going through Class 3 rapids, which is a pleasant ride. It’s nice. Everybody pretty much stays in the boat and it’s pretty good. But we’re about to go through Class 5 rapids, which is the biggest rapid you can go through,” he said.
He called on his fellow Republicans to remain on board as details are finalized. “We’ve got to make sure that everybody stays in the boat and we get the boat down the river,” Ryan said.
Ryan dismissed concerns that tax cuts due to the plan could expand the federal deficit. “We don’t anticipate a big deficit effect from this tax reform because we will broaden the base and lower the rates, plug loopholes, and get faster economic growth.”
Republicans are currently planning to pay for their proposed cuts in part by broadening the tax base, which would require eliminating trillions of dollars of tax deductions, loopholes, and other breaks, many of which are protected by special interests.
Given the fiery debate and disagreement occurring between Democrats and Republicans, we decided to summarize the predictions of pertinent organizations and economists from across the spectrum regarding the new tax plan.
The Tax Policy Center
The Tax Policy Center (TPC), a left-leaning think tank which is a joint venture of the Urban Institute and Brookings Institution, released a “dynamic analysis” of the tax plan last week and found it would not achieve President Trump’s promise of a significant, permanent boost in economic growth. The tax plan would reduce federal tax revenue by roughly $2.4 trillion over the next decade.
Howard Gleckman a senior fellow at TPC said the Framework would boost economic growth for the first few years but slow the economy after that. “(Our analysis) shows the outline would result in small increases in growth from 2018-2027 and slow the economy in the following 10 years. While the Framework’s tax rate cuts would generate new economic activity at first, those growth effects would be washed out in a few years by the effects of higher budget deficits. Because the federal government would have to borrow more to finance the tax cuts, less money would be available for private investment.”
William Gale, co-director of the TPC said Trump’s invocation of Ronald Reagan’s 1981 tax cuts as a model for his own plan was false. Trump said Reagan’s tax cuts “unleashed the economic miracle of the 1980s” and promised his own tax cuts would boost economic growth substantially – Gale said to consider those statements “alternative facts.”
Tax cuts can hypothetically grow the economy since lower marginal tax rates boost the reward for companies that invest and for people who work and save more, Gale said. However he also commented “lower rates also reduce the need for people to work and save more to achieve a desired living standard. And if tax rate cuts are not offset by other tax increases or spending cuts, they’ll require higher government borrowing. Those effects discourage future economic growth.”
Investment bank Goldman Sachs, a former employer of many current White House economic advisers, told clients earlier in October to expect a “modest” impact from Trump’s plan.
“Overall, the research literature appears to suggest that tax cuts can have modestly positive supply-side effects, though some studies find no effect,” a report they created earlier this month said.
Trump’s Treasury Secretary Steven Mnuchin, a former partner at Goldman Sachs, has gone so far as to suggest that growth from the new tax plan would increase enough to eliminate related deficits altogether.
The tax plan, by generating $2 trillion in additional revenue, “will not only pay for itself, but it will pay down debt,” Mnuchin said at The Atlantic and Aspen Institute’s Washington Ideas forum last month.
“What we’ve scored it to is 2.9 percent GDP over 10 years, which is scaling up to 3 percent… We think that’s very, very doable; we think we can do higher than that, but if we get to the 3 percent, that’s $2 trillion in additional revenue.”
President Trump’s chief economist Kevin Hassett like many other Republicans disagrees with the predictions of the TPC and other skeptics of the new tax plan. In a 2006 paper analyzing economic data in 72 countries across 22 years, Hassett and a colleague at the American Enterprise Institute, a free market think tank, estimated that a one percent increase in corporate tax rates is associated with nearly a one percent drop in wage rates. Another paper published in 2010 found a slightly smaller effect (a 0.5 to 0.6 percent decrease in wage rates per 1 percent increase in corporate tax rates) but still found that labor was ultimately paying for potential tax increases. These studies suggest that doing the opposite of what is outlined in his paper, cutting corporate taxes, would instead be a very easy way to raise wages for ordinary workers, Vox.com reported.
The Tax Foundation, a conservative tax policy organization that has given the new tax plan a mixed review, held an event earlier this month with the Tax Policy Center, whom they have often butted heads with in their economic analyses in the past. Hassett spoke at this event and outlined the rationale for his vigorous support for the new tax plan.
“Economists who have studied the effects of taxes over time have developed a consensus: lower marginal tax rates and a broader base increase rates of economic growth and well-being. I have been in this room often over the past 20 years, and have witnessed head-nodding that broadening the base and lowering the rates, as President Trump’s plan aims to do, is a recipe for better tax policy. I can’t recall ever seeing anyone in this room argue that narrowing the base and raising rates was a recipe for growth.”
“There is now a broad consensus in this country, on both sides of the aisle, that it is time to, shall we say, ‘Tear down this rate.’ Even President Barack Obama proposed lowering the federal corporate rate to 28 percent. My guess is that President Obama did not make that proposal because he thought it would have no effect.”