Or maybe this post should have been titled “The Return of the Laffer Curve”. The editors of the Wall Street Journal, predictably, argue that the Republicans should just ignore balancing the budget in favor of a revenue-decreasing tax cut:
The problem is that under the arcane rules of “reconciliation,†legislation cannot raise the deficit beyond the budget “window†that is usually 10 years. Tax writers thus feel obliged to “pay for†any tax cut based on estimates from the Joint Committee on Taxation and Congressional Budget Office, though such estimates are notoriously unreliable predictors of growth and tax receipts.
The GOP might trap itself inside this budget box. House Speaker Paul Ryan has already conceded publicly that cutting the corporate tax rate to 15% from 35% is unrealistic and the rate might have to be in “the mid-to-low 20s.†House Republicans have already abandoned a cut in the top individual tax rate, and death-tax repeal could also be on the chopping block.
The risk is that Congress ends up passing a tax cut that is a damp squib for economic growth—amid an expansion that is already long by historical standards and needs a capital investment boost.
Congress can increase its pro-growth running room by eliminating tax loopholes, and we hope they do. But some of the biggest money savers are politically difficult—even among Republicans. Repealing the state and local tax deduction gins up more than $1 trillion over 10 years, but will the GOP delegations in high-tax California and New York buy that? Deductions for charitable giving and mortgage interest have been declared untouchable.
The Joint Tax Committee is also supposed to offer a dynamic “score,†or an estimate that considers how a reform would influence behavior and growth. But Joint Tax makes highly debatable assumptions: One is that deficits increase borrowing costs for Treasury and “crowd out†private investment, as the Tax Foundation has detailed. That argument should have been repudiated in the 1980s when deficits rose but interest rates fell and growth soared. But Joint Tax persists, and the effect is to mute its growth estimates and thus any revenue gains from reform.
The best way to escape the budget trap is to have the courage of GOP tax convictions and assume reform will restore the economy to faster growth. CBO predicts average GDP growth over the next decade of a mere 1.9% a year—far below the historical norm. It assumes this will yield some $43 trillion in revenue. But if growth merely averaged 3% a year, that would add some $2.5 trillion more in government revenue over a decade.
There is good reason to believe that our corporate income tax, the highest in the OECD, is driving companies away and creating an environment in which its worth it for companies to spend billions avoiding the tax. There is also good reason to believe that our rising level of public debt is impeding economic growth. There is no equally good reason to believe that a cut in the marginal tax rates of the rich, who pay most of the taxes, will result in a spurt of business investment or even personal consumption that will boost economic growth.
The only big ticket items in the federal budget are defense, Social Security, and health care. If the Congress can’t or won’t trim any of those and it refuses to suspend FICA, the taxes paid by the poor and, in fact, the majority of Americans, in the interests of fund accounting, its only alternatives are either increasing the deficit or trading a decrease in the corporate income tax for an increase in the taxes paid by those in the dizzying heights of the economy. It should do the latter even if it makes the editors of the Wall Street Journal unhappy.
