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History belies theory that tax cuts magically pay for themselves

Ruth Marcus on

The reflexive Republican response -- not a conservative response, because this argument is anything but conservative -- is that tax cuts will somehow, magically, generate enough economic growth to pay for themselves. This is belied not only by economic theory but by history.

Could well-designed tax cuts promote economic growth? Sure. But not enough to pay for themselves. Responsible economic analysis ranges from a low of zero effect on growth (because higher debt constitutes a drag on the economy) to only a modest one.

The actual numbers don't support tax-cutters' zeal. As economists William Gale and Andrew Samwick found, "U.S. historical data show huge shifts in taxes with virtually no observable shift in growth rates."

Yes, the economy grew robustly after John F. Kennedy proposed and Lyndon Johnson signed a tax cut in 1964 (the top rate went from 91 percent to 70 percent), and after Reagan cut taxes in 1981 (he later raised them, because of fears of the ballooning deficit). But the economy also grew robustly after Bill Clinton raised taxes in 1993 and anemically after George W. Bush cut taxes in 2001 and 2003.

The Trump White House claims that its proposed corporate tax cuts could boost GDP by 3 percent to 5 percent. But its analysis doesn't consider the impact of financing the tax cuts through deficit spending.

Indeed, the non-partisan Tax Policy Center found that increased growth would be counteracted within a few years by the drag of higher deficits; overall, the plan would increase deficits by $2.4 trillion during the first decade.

Trump wants tax cuts -- the biggest ever! -- because he promised them. Republicans take tax cuts as a matter of faith; they are desperate for a legislative win, any win, to take to voters next year. So deficit-financed tax cuts may be a political imperative. As an economic matter, they are simply reckless.

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Ruth Marcus' email address is ruthmarcus@washpost.com.

(c) 2017, Washington Post Writers Group

 

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