Trump Plan Highlights Dubious Assumption at Heart of Republican Tax Proposals
Republican presidential front-runner Donald Trump revealed a tax plan on Monday that, like many of the proposals put forth by his GOP rivals, contains a dubious assumption: that tax cuts will generate rapid economic growth.
Trump's proposal is similar to the one Jeb Bush unveiled in early September. Both slash the top individual tax rate from 39.6 percent (Trump to 25 percent, Bush to 28 percent) and the corporate tax rate from 35 percent (Trump to 15 percent, Bush to 20 percent) and would eliminate the estate tax. Both provide the largest share of benefits to upper income earners.
To address the trillions of dollars in lost revenue, both Trump and Bush point to “dynamic scoring,” a method controversial among economists, and popular with congressional Republicans, that assumes that tax breaks spur economic growth. While Bush assumes 4 percent growth under his plan, Trump said his plan could boost it as high as 6 percent.
“We're going to have growth that will be tremendous,” Trump told reporters on Monday.
Leonard Burman, the director of Tax Policy Center in Washington, said a projection of 6 percent growth is “completely implausible.”
“It's faith-based revenue scoring,” Burman said in an interview.
But Trump is not alone in making that ambitious calculus when proposing large tax cuts.
A paper by four economists, including Jeb Bush adviser Glenn Hubbard, estimates that Bush's plan will cost $1.2 trillion over a decade under dynamic scoring—and $3.4 trillion without it. That is despite the fact that Bush calls for limiting several specific tax expenditures, most notably by eliminating the state and local deduction, one of the largest in the federal code.
Dynamic scoring assumes that tax cuts will generate economic activity, an idea conservatives broadly embrace. Many mainstream economists avoid that assumption because they prefer not to make projections about macroeconomic impacts of fiscal policy, as economic behavior is difficult to predict and dependent on many factors. Critics note that tax cuts haven't always been a panacea for growth in the past; progressive economist Jared Bernstein has labeled dynamic scoring “fairy dust.”
On Fox News Sunday, Bush said the tax policies of Ronald Reagan and George W. Bush “didn't [add to the deficit] as greatly as the static thinkers on the left think. They created a dynamic effect of high growth, and that's what we need.”
The Tampa Bay Times' fact-checking website, PolitiFact,rated Bush's claim “mostly false,” noting that tax cuts under George W. Bush led to the second-lowest rate of average annual inflation-adjusted GDP increase, economic growth among the last five presidents, a rate of 2.1 percent. By contrast, tax increases under Bill Clinton led to an average growth rate of 3.9 percent.
“At this point, the prevailing view among economists is that you'd have some economic benefits but not nearly the amount that [the Trump and Bush plans] assume,” said Roberton C. Williams, a tax expert with the Urban Institute.
Bush's father, former President George H. W. Bush, questioned the wisdom of relying on tax cuts as an economic driver. As a presidential candidate in 1980, he referred to Ronald Reagan's plan to do just that as “voodoo economics,” although he embraced the plan after he joined Reagan on the Republican presidential ticket that year.
The concept has gained support in the GOP since then, and many Republicans have invoked dynamic scoring to argue that tax cuts wouldn't be as costly as traditional budgetary forecasting models predict.
Senator Marco Rubio's tax-cut plan—which would slash individual and corporate taxes and repeal taxes on capital gains and investment income—is similarly premised on the promise of growth. “The goal of this plan is to generate growth,” Rubio said at a news conference in March.
The Tax Foundation, which advocates for tax cuts, found that Rubio's plan (which is co-authored by Senator Mike Lee) would cost $1.7 trillion under dynamic scoring, and upwards of $4 trillion over a decade without growth assumptions. The Tax Policy Center said it “blows a huge hole in federal finances” as it doesn't say how it would be funded.
Some Republican presidential contenders—such as Texas Senator Ted Cruz and Kentucky Senator Rand Paul—have proposed wiping out the federal tax code and installing a simple flat tax. Paul has endorsed a 14.5 percent flat rate, which Williams said was “just too low” to make up for lost revenue.
While taxes do have an impact on the economy, measuring that impact is a matter of debate, said Matt McDonald, a partner at Hamilton Place Strategies, a Washington-based firm that advises companies on economic policy.
“It's like trying to measure the exact location of an atom; whenever you measure it, it moves,” said McDonald, a former assistant communications director in the George W. Bush White House.
Apart from rosy assumptions about economic growth, the most detailed Republican tax plans—those by Bush and Trump—both grant disproportionate breaks to high income earners. Democrats will be keen on highlighting that fact in a general election.
“The Trump plan and the Bush plan clearly benefit the wealthy because that's where the biggest tax cuts are coming from,” Williams said.