I’ve been waiting for this.
Rep. Paul Ryan has just put out a revised analysis of his new House budget, but this one reflects how his pro-growth tax reform ideas would boost economic growth, which in turn would cut debt even faster. Team Ryan concludes “the budget could achieve balance in the mid-to-early 2020s, with the upper-bound growth assumption producing budget balance within the ten-year budget window – much sooner than CBO’s estimated balance date of 2039.”
Unlike the Congressional Budget Office forecast, this estimate incorporates solid academic research showing how tax reform can supercharge growth:
House Budget Committee (HBC) staff attempted to illustrate the potential fiscal effects resulting from an alternative growth scenario (AGS). This scenario was meant to capture a range of possible economic outcomes that could be associated with the implementation of the policies in the budget.
For instance, as Alan Auerbach and Kevin Hassett note in their book on fundamental tax reform, the evidence from the broad academic literature on this subject suggest that such a bold reform plan could “eventually increase economic output by between 5 and 10 percent, or perhaps a slightly higher range.” Similarly, Columbia University economist Glenn Hubbard suggests that fundamental tax reform could lead to a growth boost of between 0.5 and 1.0 percentage point per year over a decade.
HBC staff first constructed a “base-case” long-term GDP path using a standard assumption that nominal GDP grows by a fixed amount (about 4.3 percent per year) after the ten-year window. Tax reform was assumed to be enacted in 2013 with the economic benefits beginning to materialize in 2015. The alternative scenario was then obtained by applying the growth rule of thumb above to the base case, increasing GDP growth over the subsequent decade by 0.5 to 1.0 percentage point per year and then allowing GDP to ratchet back down to its trend rate in subsequent years.
Under this scenario, GDP growth is significantly higher than the base case over the medium and longer-term. As mentioned earlier, fundamental tax reform would likely boost the supply of labor and the degree of productivity in the economy (through, for instance, more investment and a higher capital stock). By 2030, the level of economic output is between 6 and 13 percent higher than the base case – within the general range mentioned by Auerbach and Hassett.
A larger and faster-growing economy leads to significantly higher revenue than the base case. This higher amount of revenue, when compared to the spending levels outlined in The Path to Prosperity, leads to a much-improved fiscal path. Assuming higher growth within the range cited above – percentage-point increases of 0.5 (lower-bound AGS), 0.75 (mid-point AGS), and 1.0 (upper-bound AGS) – the budget could achieve balance in the mid-to-early 2020s, with the upper-bound growth assumption producing budget balance within the ten-year budget window – much sooner than CBO’s estimated balance date of 2039.
Some conservatives have been critical of the Ryan plan because it did not balance the budget quickly enough. I think that complaint has been answered to a great degree, though I would still like to see Medicare reform implemented sooner. But just as important, this analysis show how pro-growth tax reform of the Ryan plan can boost jobs and income and help return America to real prosperity.