PRO: The U.S. economy has been plagued with unacceptably slow growth since the 2007-09 recession — so slow that six years into our supposed recovery, policymakers still talk about the need for economic stimulus. It should not be this way.
Spurring economic growth requires broad-based reforms that must include effective tax reform. Gov. Jeb Bush’s proposed pro-growth tax reform, mimicked by Donald Trump, is an important step forward that will simplify our tax code, lower the top marginal income tax rates, and help accelerate economic growth.
Thanks to recent tax increases, the highest marginal income tax rates in the country confiscate around one-half of a family’s income, when federal and state income taxes and payroll taxes are included.
Reducing high tax rates increase the incentive to work, save and invest. It accelerates economic growth. And, this is not just theory.
Over the past 50 years, there have been several major reductions in federal income tax rates, including 1964, 1982, 1986, 1997 and 2003. There have also been several rate increases, including 1991, 1993 and 2013.
Generally speaking, economic and job growth was stronger following the reductions in tax rates, and weaker following the tax rate increases. Perhaps more important, during the periods of robust growth, wage gains were broadly shared across all income groups.
As for budget effects, federal income tax revenue will grow more slowly under the Bush tax plan than current revenue growth expectations. But, only the federal government’s accounting calls slower revenue growth a revenue loss.
Just as important, greater budget discipline in Washington is growth enhancing.Economic growth is harmed when government spending is wasteful and excessive, and there are many reform opportunities. Simply because past attempts to control spending have failed does not mean future attempts cannot succeed.
Economic growth occurs when individuals are incentivized to work, save and produce, and a fiscally responsible government spends taxpayers’ money wisely. Bush’s plan achieves these important goals.
Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.
CON: One of the oldest tricks in the politician’s playbook is to promise big tax cuts, and when critics howl about how the lost revenue will balloon the deficit, insist there will be large but unspecified spending cuts or, even better, fantastic economic growth that will help the cuts pay for themselves.
Ronald Reagan used this tactic to pass big “supply side” tax cuts in 1981, and George W. Bush updated it to pass another big round of cuts in 2001. In both cases, the result was the same: bigger deficits and more debt.
So no wonder the tax plans Jeb Bush and Donald Trump unveiled this month sound familiar. Leave aside the details about whose taxes would get cut by how much. Both proposals amount to enormous drains on the federal Treasury.
Bush’s plan is less irresponsible than Trump’s, but both would make responsible budgeting impossible over the next decade without massive cuts in big-ticket government spending programs, from defense to Social Security. Or more borrowing that would spike deficits and balloon the national debt, which already exceeds $18 trillion. Funny, but we don’t hear either candidate for the 2016 Republican presidential nomination talking about that.
Instead, we’ve heard both promise their plans will unleash spectacular economic growth that could offset some or all of the lost revenue. Call this the rosy scenario. Bush says his proposal will spur steady 4 percent annual growth, about double the current rate. The non-partisan Tax Foundation puts the revenue loss from Bush’s tax cuts at $3.6 trillion over the next 10 years, but at $1.6 trillion when factoring in the positive effects from a booming economy — a technique called “dynamic scoring.”
The problem with dynamic scoring is that you can make up any number you want, and economists are all over the place about what the right number should be. Most don’t seem to think Bush’s plan can achieve 4 percent growth, which means the resulting deficits would be bigger and more damaging than Bush supporters predict.
Because Trump claims to do everything bigger and better than his rivals, he’s insistinghis plan will create growth of 5 percent or even 6 percent. “This will be like a rocket ship for the economy,” Trump boasted to NBC’s Matt Lauer. The Tax Foundation calculated Tuesday that Trump’s plan would increase the deficit by more than $10 trillion over 10 years, even with dynamic scoring.
Let’s call this for what it is: snake oil. The economy is stuck in frustratingly low growth, and the kind of acceleration Bush and Trump promise would be terrific if it happened. But too many tax cuts, like too much beer, can be a problem — something that ardent tax cutters never seem to grasp. Supply-siders advocated big state tax cuts in Louisiana and Kansas, for example, promising explosive growth. Instead, job growth in both states has lagged the national average, and the lost revenue blew big holes in the states’ budgets, leading to destructive cuts in education and other vital programs.
An analysis last year by the non-partisan Congressional Research Service found “little relationship” between tax rates and economic growth. The analysis said claims that economic growth significantly reduces revenue lost to tax cuts “do not appear to be justified by the evidence.”
We wish Bush and Trump would read the report, but we’re not optimistic that it would change their minds. This seems to be a lesson that politicians and the nation are doomed to learn over and over again.
USA TODAY’s editorial opinions are decided by its Editorial Board, separate from the news staff.