MANY ECONOMIC MODELS SHOW TAX CUTS RAISING THE DEFICIT
consin 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,” 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 Donald 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. Smetters and his Penn Wharton team have another. Perhaps the most important scorekeeper on that front, the 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 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 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. 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.
Kotlikoff’s approach has been criticized by several liberal economists, including Jason Furman, a former top economist for President Barack Obama, who gives slideshow presentations on what he calls the “seven deadly sins of overly optimistic dynamic scoring.”
Kotlikoff’s model commits several of those sins, Furman said, including Sin No. 2: “Use estimates from ‘similar’ tax plans that are not similar.”
Last week, 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?” 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.
Auerbach, who has teamed up with 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.”
Auerbach cautioned that he was speaking from informed opinion — and not from the results of any modeling.