Republican Tax Plan Would Add $191 Billion to the Debt – or Is It $2.4 Trillion?
Policy + Politics

Republican Tax Plan Would Add $191 Billion to the Debt – or Is It $2.4 Trillion?


House GOP leaders wasted little time capitalizing on a new study by the conservative-leaning Tax Foundation concluding that – under the best of circumstances – the trillions of dollars in tax cuts sought by Republicans would hardly put a dent in the long-term debt.

“The Tax Foundation’s analysis proves that our blueprint will deliver a tax code built for growth and will improve the lives of all Americans,” House Ways and Means Committee Chair Kevin Brady (R-TX), said in a statement on Tuesday. “The Foundation also confirmed today that our final legislation will ultimately be revenue neutral.”

Related: House GOP Leaders and Trump Find Common Ground on New Tax Proposals

The proposal unveiled a week ago by House Speaker Paul Ryan (R-WI) would reduce the number of individual tax brackets from seven to three and slash the marginal tax rates; substantially lower corporate tax rates; increase the standard deductions for individuals and families; and abolish the highly unpopular alternative minimum tax and estate tax.

The three new individual tax rates under the House approach would be just 12 percent, 25 percent and 33 percent, while the 35 percent corporate tax rate would be brought down to 20 percent. The House GOP plan would also “broaden the tax base” by eliminating many itemized deductions, with the major exceptions of home mortgage interest and charitable deductions.

The Tax Foundation, which has served as an arbiter of sorts of tax plans during the presidential campaign season, concluded that what looks like a $2.4 trillion House GOP tax cut might end up costing the Treasury no more than $191 billion over the coming decade.

That’s because according to the Tax Foundation, the net effect of the Republicans’ marginal rate cuts on individual and corporate taxes and tax reforms to encourage investment and savings would boost Gross Domestic Product by 9 percent over the coming decade, above and beyond its current growth trajectory. That is a highly ambitious growth target in an economy that rose by only 1.1 percent on an annualized basis in the first quarter of 2016.

Related: Experts Weigh Donald Trump’s Tax Plan, and Find It Wanting

In other words, while economists using traditional static methods for calculating the impact of a tax cut on the budget might conclude the GOP plan would cost $2.4 trillion over the coming decade, supply-side economists who put their faith in dynamic scoring believe the price tag will amount to only $191 billion once the larger economic benefits kick in.

Kyle Pomerleau, director of federal projects at the Tax Foundation and chief author of the study, said in an interview that “What separates our dynamic number from our static number is that the dynamic number reflects the impact that the plan has on the economy, and translates it into additional revenue or loss of revenue if economy is smaller.”

The Tax Foundation is a leading proponents of dynamic scoring.

“If a policy were to increase the size of the economy, we would expect wages to increase and profits to go up, and that will broaden the income tax base or corporate tax base and result in more revenue from those taxes than we otherwise would have gotten,” Pomerleau added. “Traditional static estimates don’t account for that additional economic activity while dynamic estimates does.”

Related: Trump Retreats on Comments on Raising Taxes on the Wealthy

According to the Tax Foundation analysis, the larger economy prompted by the tax cuts would “translate into 7.7 percent higher wages and result in 1.7 million more full-time equivalent jobs.” Because of the larger economy and broader tax base, “the plan would reduce revenue on a dynamic basis by $191 billion over the next decade,” the report states.

Republicans and Democrats have feuded for decades, dating back to the Reagan administration, over the value of dynamic scoring. Republicans have argued that major tax cuts stimulate the economy and generate increased revenues that could help offset the loss of revenue.

They argue that more conventional or static analysis may capture the behavioral response of businesses and individuals to new tax incentives, but it doesn’t anticipate the likely impact of the legislative changes on the economy as a whole.

According to the Republicans’ math, all the proposed tax cuts in the House GOP plan would cost the Treasury $8 trillion in foregone revenues in the coming decade. But that would be offset by $5.3 trillion of loophole closings and other “pay-fors” and an estimated $2.5 trillion of “dynamic” revenues.

Related: ‘Dynamic Scoring’ Is Hiding a $2 Trillion Hole in the GOP’s Balanced Budget

Democrats, meanwhile, have long argued that dynamic scoring for the most part is little more than “voodoo economics” and that rosy projections of the benefit of tax cuts merely obfuscate the true cost to the government.

In May, 2015, the GOP-controlled Congress adopted a concurrent budget resolution for fiscal 2016 requiring the Congressional Budget Office and the Joint Committee on Taxation to incorporate the long-term “macroeconomic” or dynamic effects of legislation on the budget “to the greatest extent practicable.”

House Ways and Means Democrats have charged that the Republicans have “returned to voodoo economics so they can have it both ways – cut taxes and pretend not to increase the deficit.”

The new tax analysis has provided an important boost to Ryan and other House leaders in fashioning a key component of the party’s platform heading into the general election campaign. Ryan has released a series of proposals on issues ranging from taxes to poverty to national defense and terrorism.

Related: 5 Gimmicks in the GOP’s ‘Gimmick-Free’ Budget 

Trump released his own tax plan last September that in many ways is similar to the latest House GOP approach, but is far more expensive, regardless of whether it is scored on a static or dynamic basis.

According to a previous Tax Foundation analysis, Trump’s tax cut plan would boost GDP by 11.5 percent over the coming decade. But at the same time it would drain federal revenues by $11.9 trillion if calculated using the static model or $10.1 trillion using more favorable dynamic scoring.

The big difference in cost between the House GOP and Trump plans, according to Pomerleau, is that Trump would slash taxes without “broadening the tax base” by closing loopholes, while the House version “focuses on reducing marginal rates but also broadening the base.”

“They want to tax more economic activity at lower rates,” Pomerleau said. “The best way to understand Trump’s plan is that it’s just a tax cut. He’s not expanding the base. So for that, you’re just losing revenue – whether static or dynamically.”