The Congressional Budget Office has come out with its much-anticipated “budget score” of the Republican tax plan. They found that it would add $1.7 trillion to the deficit over the next decade.
In order to allow the measure to bypass an inevitable Democratic filibuster in the Senate, the GOP is trying to bring that down $200 billion, or to $1.5 trillion, to accommodate an arbitrary Senate rule that allows legislation to pass via “budget reconciliation.”
Keeping the bill in a process of “reconciliation” is necessary to avoid being subject to the 60-vote requirement that allows Senate leaders to avoid a filibuster. In other works, keeping the bill in “reconciliation” is essential to its survival.
Why the Congressional Budget Office’s score, and entire approach to budgeting, is nonsense
Here’s the problem that nobody is addressing: The CBO score of the tax plan is nonsense.
It uses a static approach, rather than a dynamic one. In other words, the CBO is estimating that individuals and businesses will continue to behave precisely as they would have under the old tax laws. That is how they are determining how much revenue the government can expect to collect under the new ones.
But that assumption is ludicrous for a tax measure such as this. It’s like saying that if McDonald’s cuts the prices of its cheeseburgers by 20 percent, the restaurant franchise is going to be 20 percent less profitable.
But lower prices are likely to increase volume of sales. The fast food chain could well see a surge in revenue, even with the price cuts. Similarly, a price hike of 20 percent is no guarantee of higher profits. In fact, it would probably be counterproductive. Fewer people buying costlier cheeseburgers would hurt the bottom line at the Golden Arches.
Cutting marginal and corporate taxes yields higher economic growth
Taxes function the same way. The is not a complicated or controversial point: The simple assumption that a lower rate will mean lower government revenue does not take into account the stimulative nature of tax cuts.
Consider the Reagan tax cuts of 1981, which slashed the top rate from 70 percent to 28 percent. During Reagan’s term in office, total tax revenue fell from 19.2 percent of Gross Domestic Product in 1982 to 18.4 percent of GDP in 1989 when Reagan left office.
But during that same time frame, the economy grew by 34.3 percent, which meant that the 18.4 percent slice of the economic pie in ’89 was far larger than the 19.2 percent slice in ’82. In the case of those tax cuts, lower rates led to more money for the government, not less.
The reality is that the tax burden for Americans when measured as a percentage of the Gross Domestic Product doesn’t change much. Regardless of where Congress sets the tax rates, Washington collects roughly 20 percent of GDP in tax revenue. If that’s the case, then rates should be lower rather than higher, as 20 percent of a growing, vibrant economy is a larger chunk of change than 20 percent of a marketplace stifled by onerous taxation.
Not all tax cuts are created equal, and the ‘millionaire’s tax’ is a stupid idea
The Trump administration understands this in broad strokes, but it falls down on the details.
The fact is that not all tax cuts are created equal. Slashing the corporate tax is likely to bring in increased revenue, as it will attract businesses back to the United States that had previously fled to escape the highest corporate tax rate in the world.
But lower income tax rates are not likely to have a similarly stimulative effect, as rates are already low enough that nearly a majority of Americans pay no income taxes at all.
In addition, the Trump administration’s proposal to leave the highest income tax rates unchanged and even attach a “surcharge” on income above a million dollars a year is a misguided attempt to throw a bone to the class warfare crowd.
A higher rate is not likely to lead to higher revenue. In fact, it will likely have the opposite effect.
Time and again, lower rates have been proven to be effective in spurring economic growth and increasing government revenue. It’s time that Washington learned the lessons of its own success – and doesn’t let itself get tripped up on the static scoring approach of the CBO.
(Photo of Donald Trump speaking during the Presidential Debate at Hofstra University on September 26, 2016 in Hempstead, New York by Win McNamee/Getty Images)