The Trump administration’s claim that the GOP tax plan will deliver a “$4,000 pay raise” to the typical American household continues to generate controversy among economists and policy experts. The Council of Economic Advisors, led by Kevin Hassett, published a paper last week that attempted to prove the claim, but it did little to convince critics. On Friday, the CEA tried again, publishing blog post with a lesson in basic economics (it even quoted Adam Smith) intended to remind everyone that taxes reduce economic activity, so cutting taxes will increase it — the only question is how much.
But the CEA’s response did little to assuage critics, led by former Treasury Secretary Larry Summers, who published a response in The Washington Post. Summers dismissed the arguments in the CEA blog post — which cited numerous conservative economists, including Greg Mankiw, Casey Mulligan, Larry Kotlikoff and Jack Mintz (paywall) — as overly simple or mistaken, or both. And Summers ended his critique with a blunt warning for what he sees as an overly politicized CEA chief: To preserve his credibility and the administration’s, Hassett needs to “back off.”
Jason Furman, who led the CEA under President Obama, also joined the critics, writing in The Wall Street Journal (paywall) on Sunday that the Trump administration’s paper bases its estimate on “far-fetched” supply-side effects not supported by solid economic research. And, he adds, the White House analysis ignores the economic costs of rising deficits resulting from lower tax revenue.
Why it matters: Disputes among economists rarely move the political needle, but this one may have real consequences as Republicans continue to push the idea that their plan will provide a substantial middle-class tax cut.