Pethokoukis, Economics, Taxes and Spending

Sorry, tax rates aren’t going back to 1920s levels

Image Credit: Wikimedia Commons via the Library of Congress

Image Credit: Wikimedia Commons via the Library of Congress

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.

8 thoughts on “Sorry, tax rates aren’t going back to 1920s levels

  1. Is this a joke or is it just propaganda?
    From what I just read, we didn’t even have income tax until WWII when it was “voluntary” to help the “war effort”. Sure, there was a law (fake law) long before that but nobody collected them until WWII.
    THe only reason we have it now is to pay off the banksters who make “money” from air and charge “interest” on it when the Treasury is the only LEGAL institution to be able to do it and the Treasury could do it with NO INTEREST!

  2. The income tax system is VOLUNTARY . . the Super rich can elect to pay zero – stay in all current positions thereby eliminating any taxable gain . . This will place more pressure on the working class and the the business taxes . .

    Guess what the Corporations elect to reduce costs [layoffs and off shoring more] again then the need to raise the Corporate tax or make benefit cuts in programs . . well the working class must be indirectly increased in taxes by paying more for all goods and Services [inflation] –

    Want proof just look to the EU nations and the Socialist North Europe city states nations . . Sorry folks but the income tax system collapses if the payer stop making profits thereby owing no taxes.

  3. the biggest question in the schemes is what is PlanB if Plan A fails?

    it’s almost seems like this is bass ackwards.

    cut spending, then cut taxes.

    cutting taxes first on a “theory” of supply-side economics with no Plan B if it does not work just does not seem smart.

    the whole idea of cutting taxes without regard to spending levels is loony tunes to start with.

    we already know what happens when you do this.

    it creates structural deficits…

  4. Sad to say, all of Dubya’s tax cuts must go away, including cuts for the middle class. It will be easier to swallow if we whack special interest tax breaks first.

    • cutting taxes AGAIN when you already have a 17+ trillion debt and part of the way you got to that debt – was tax cuts…that never generated the predicted increased tax revenues seems even dumber.

      almost as dumb as thinking we can balance the budget without cutting the military and only cutting entitlements – aka the Ryan “tax” Plan.

      used to be a time when fiscal conservatives – were.. ouch fiscal conservatives!

      we don’t need to go back to a 1920 style national defense but we’re not going to balance the budget much less cut the debt if we don’t depart LA LA Land on tax cuts.

      we keep looking at the budget with FICA/SS included and that just confuses the reality as FICA is a dedicated tax for only one earmarked function and not used for general funding.

      if you take FICA out of the tax revenues and just look at what we take in – in individual and corporate income taxes, the number is about 1.5T.

      that’s you budget that you have to fund entitlements, National Defense and the rest of Govt with.

      It’s a scary though that someone would say something like ” hey, let’s cut another 1/2 trillion from taxes” – so we’ll only have one trillion total coming in.

      like I said, it used to be a time when you could not just call yourself a fiscal conservative, you actually had to prove it with your policies.

      Now days, fiscal conservative denotes someone who thinks: ” gee.. I wonder how much I could screw up the govt, budget and debt even more? more tax cuts? “

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