Republicans Search for Proof Their Tax Plans Will Pay for Themselves
Republican leaders keep insisting that their plans to cut taxes by $1.5 trillion over the next decade will not add to the national debt — yet economic analyses of the Senate and House proposals keep predicting that the plans will do just that.
The disconnect is prompting House and Senate Republican leaders and the Trump administration to hunt down — and promote — more optimistic forecasts, even if they exclude large parts of the tax bills from their analyses or assume growth-boosting features that are not, in fact, in the bills.
“When you’re in a political organization, you’re constantly model shopping,” said Kent Smetters, a former economic adviser in President George W. Bush’s administration, who is now the faculty director of the Penn Wharton Budget Model at the University of Pennsylvania.
Republican leaders have said the tax cuts they are planning will essentially pay for themselves. Lawmakers gave themselves, via their 2018 budget resolution, space for $1.5 trillion in revenue losses from tax cuts, but they have promised those losses will be offset by increased economic growth spurred by the tax overhaul. Finding a model that supports the ambitious economic growth projections is critical to their ability to pass a tax cut along party lines.
The House and Senate bills have been introduced and amended at a rapid clip, and economists are only now beginning to plug their details into sophisticated models that predict how much additional growth the cuts might produce. So far, every so-called dynamic analysis that scrutinizes the full details of the bills and factors in economic growth finds that those plans would add at least $500 billion and as much as $1.7 trillion to the deficit.
In an interview on Friday, Senator Mitch McConnell of Kentucky, the majority leader, said that “we’re confident that the $1.5 trillion gap would be filled” by economic growth. Mr. McConnell said the tax bill would add 0.4 percentage points to annual economic growth, though he did not cite a specific analysis suggesting that assertion. “So we believe this is a responsible budget and a responsible tax reform,” he said.
Speaker Paul D. Ryan of Wisconsin insisted last week that the House bill would not add to the deficit, even after an analysis by the independent Tax Foundation, which uses a model that tends to find large growth effects from tax cuts, found that the bill would add $1 trillion to deficits over a decade.
“We believe that we’re going to be fine on that,” Mr. Ryan said. “We believe that when you look at other analysis, whether it’s going to be Treasury or the rest, that we’re right there in the sweet spot, with economic growth that gives us more revenue with where we need to be.”
The House is preparing to vote on a tax overhaul bill this week, while the Senate Finance Committee begins amending a companion version, as part of a whirlwind push to deliver tax legislation to President Trump’s desk by Christmas.
The Treasury Department has not yet released any economic analysis of the congressional plans. Economists at Goldman Sachs said last month that they expect tax cuts to generate enough additional growth to offset about a fifth of their revenue losses. That means $1 trillion of net tax cuts would lose $800 billion on a dynamic basis.
Dynamic scoring is inexact in the best of circumstances. Under the compressed congressional schedule this fall, it is even more difficult, said Alan J. Auerbach, a University of California, Berkeley, economist who is widely considered a godfather of modern dynamic scoring models.
As a result, only a few models have churned out consistent dynamic analyses that attempt to account for all the provisions of the House and Senate bills. The Tax Foundation has one. Mr. Smetters and his Penn Wharton team have another. Perhaps the most important scorekeeper on that front, the congressional Joint Committee on Taxation, is due to weigh in this week, with an analysis of the bill pending in the House.
Ironically, the models that so far have produced the least optimistic forecasts for the Republican plan are the ones that most closely track the assumptions conservatives have long espoused about the economy: that racking up deficits and debt will hold back growth.
That is the case with the Penn Wharton model, which finds that the House bill would lose between $1 trillion and $1.7 trillion over a decade in revenue, after accounting for growth, depending on various assumptions about the flow of investment dollars in the global economy and the growth-stoking power of tax cuts. The Tax Foundation’s more optimistic model projects the Senate bill would lose $500 billion in revenue after growth effects.
Other economists have produced optimistic effects based on approximations of a bill Congress might eventually agree upon. On Friday, Douglas Holtz-Eakin and Gordon Gray of the conservative American Action Forum released an analysis that attempts to mirror the joint committee’s methodology, but that models a bill with smaller net tax cuts than in the Republican plans. It found such a plan could cost as little as $310 billion over a decade.
The one model so far to suggest that the bills could fully pay for themselves comes from a Boston University economist, Laurence J. Kotlikoff, who employs what he calls a more comprehensive view of the global economy’s dynamics than other economists do. Mr. Kotlikoff’s analysis finds large growth effects from the House and Senate’s plans to cut top corporate tax rates to 20 percent from 35 percent today. It makes some growth-boosting assumptions that differ from the bills as drafted, and it essentially excludes the impacts of personal income tax changes on the economy; other models find those changes would affect growth and revenue.
Mr. Kotlikoff’s approach has been criticized by several liberal economists, including Jason Furman, a former top economist for President Barack Obama, who now gives slide-show presentations on what he calls the “seven deadly sins of overly optimistic dynamic scoring.”
Mr. Kotlikoff’s model commits several of those sins, Mr. Furman said, including Sin No. 2: “Use estimates from ‘similar’ tax plans that are not similar.”
Last week, Mr. Kotlikoff was on the phone with a reporter, explaining the intricacies of his model, when a call came in on the other line from a staff member of the House Ways and Means Committee.
“They’re interested because it supports their view, right?” Mr. Kotlikoff said, referring to the Ways and Means staff member. He then resumed explaining why that should be the case — why his model was better than others at predicting the path of growth.
Mr. Auerbach, who has teamed up with Mr. Kotlikoff on past tax studies, but not the current effort, said he was skeptical that the Republican plans would generate enough growth and revenue to pay for themselves. “To say that it might happen is one thing,” he said. “To say you expect it to happen is quite different.”
Mr. Auerbach cautioned that he was speaking from informed opinion — and not from the results of any modeling.
By JIM TANKERSLEY