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Tax Reform, Growth And The Deficit
The Wall Street Journal
November 27, 2017

Start with the fact that the GOP budget outline allows for a net tax cut of $1.5 trillion over a decade on a statically scored basis thanks to a deal brokered by Senators Pat Toomey and Bob Corker. Democrats and their media chorus are using that number to claim that reform will bust the budget and add to the federal debt. This comes with ill grace from people who cheered Barack Obama’s doubling of the national debt in eight years, but it’s also overwrought.

CBO’s estimates are inherently speculative because no one knows when the next recession might hit or what some future Congress might do. But CBO has typically underestimated the growth and revenue feedback from tax cuts. A classic example is the 2003 cut in the tax rate on capital gains. Dan Clifton of Strategas Research notes that in January 2004, eight months after the tax cut passed, CBO predicted $215 billion in capital-gains revenue through 2007. The actual figure? $377 billion. CBO underestimated economic growth and how much investors would cash in their gains.

CBO’s roughly $43 trillion revenue estimate also depends on a projection of average economic growth of 1.9% a year. But the U.S. economy has never grown that slowly for so long. CBO says that every 0.1% increase in GDP adds about $270 billion in revenue over 10 years. That means a mere four years at 3% growth—the U.S. historical norm—could fill a $1 trillion hole.

Another false charge from the left is that the GOP bills are merely a tax cut without any reform. But the bills eliminate trillions of dollars in loopholes, such as the state and local tax deduction. The House bill caps the mortgage-interest deduction at $500,000.

Also on the chopping block are business carve-outs—including cuts in the deductibility of interest—that are used to pay for lower business tax rates. We’d like to see every loophole eliminated, but this really is the most far-reaching business-tax reform since 1986.

The question Senators need to ask themselves in the end is whether this reform, all things considered, is a net benefit for the country. We think it is—not least because it is a vote of confidence that better policies can restore America’s traditional economic vigor. Democrats and their media friends have given up on that score, concluding that we are doomed to “secular stagnation” and that our politics must devolve into a brawl to divide up the spoils of whatever meager growth we can muster.

Read the full editorial here.