The House GOP is cooking up a plan to cut the corporate tax rate to 25% from 35% while collapsing the seven individual tax brackets into just two—10% and 25%. That top individual tax rate would be the lowest since the 1920s.
Now, as Scott Hodge and Steven Entin of the Tax Foundation point out, the Joint Tax Committee statically scores these changes — assuming no boost to GDP growth — as losing $5 trillion over a decade, $1.3 trillion from the corporate rate cuts and $3.7 trillion from the individual rate cuts.
But Hodge and Entine say their dynamic model shows economic growth feedback from the tax rate reductions could close that revenue shortfall by $1.5 trillion:
Tax Foundation economists performed the same exercise using a dynamic tax model that accounts for the macroeconomic benefits of changes in tax policies. Our model indicates that Mr. Camp’s rate cuts would cost the Treasury 30% less than what the Joint Tax Committee estimates over the 10-year budget window. The corporate rate cuts would cost 60% less over 10 years, and nearly pay for themselves by year 10. The individual rate cuts produce less economic feedback effects but still cost 20% less than the Joint Tax Committee’s estimates. …
Our model indicates that Mr. Camp’s rate cuts would boost GDP by 4.7% within a decade, generating $2 of economic growth for every $1 in revenue that it “loses” for the Treasury. Moreover, we estimate that the rate cuts in Mr. Camp’s plan would increase the nation’s capital stock by more than 11%, which would help lift wages by 2.7% for all workers.
Presumably, most of the rest of $3.5 trillion budget shortfall would be closed by tax base broadening — closing loopholes and eliminating or downsizing tax breaks. But some of that base broadening would actually counteract the pro-growth rate reduction:
By our estimates, nearly two-thirds of the $1.3 trillion worth of tax expenditures on the Treasury’s list protect taxpayers from double taxation (lower rates on dividends and capital gains on income already taxed at the corporate level), protect savings (by deferring taxes on IRAs, 401(k)s and pensions until they are spent in retirement), or otherwise move us toward a tax base that reflects the full cost of plant and equipment (immediate expensing or accelerated write-off of business investment). Eliminating these protections to pay for lower rates would undo the benefits of lower rates.
Yet even if that were not the case, there would still be a huge shortfall over the next decade. And in the real world, Democrats will push hard for some tax expenditure elimination be devoted to raising revenue. While I am in favor of dynamic scoring, getting rates — particularly on the individual side — down to anywhere near a revenue-neutral 25% seems like an impossible lift without some sort of tax offset like a VAT or carbon tax — both currently unlikely. (You could for instance combine a low flat tax on wealthier Americans with broad consumption tax.)
And as I have written before, it’s equally unlikely we can keep government spending at anywhere near its historical 20.4% of GDP level given demographics. So you can’t pay for rate cuts through discretionary or entitlement cuts, even if that were politically possible. A better option would be a progressive consumption tax like the “X” tax that would raise needed revenue in as economically efficient and pro-growth way as possible.