For weeks now, White House officials, Treasury Department officials, and G.O.P. leaders on Capitol Hill have been blithely asserting that their big tax plan—which features huge giveaways for corporations and wealthy investors in private partnerships—would pay for itself. The argument is that the plan, by sparking a wave of business investment and hiring, would generate enough extra tax revenues over time to offset the initial fall. Gary Cohn, Donald Trump’s top economic adviser, said it (“We believe we’re going to get more than enough growth to pay for this”). Paul Ryan, the Speaker of the House, did, too (“We believe … that we’re right there in the sweet spot, with economic growth that gives us more revenue with where we need to be”). And Mitch McConnell, the Senate Majority leader, agreed (“We believe this is a responsible budget and a responsible tax reform”).
Yet there was never much credible evidence to support these claims. The Republicans’ own budget, which the House of Representatives passed last month, assumed that the G.O.P. tax proposals would cost about $1.5 trillion over ten years, and a number of unofficial but independent analyses of the plan concluded that its price tag was in that range.
But as the G.O.P.’s dual tax bills made their way through the House and Senate, their authors dismissed these analyses, saying that they were hopelessly static and didn’t take account of dynamics—i.e. all the supercharged economic growth that the tax cuts would generate. It just so happens, however, that over the past decade, the official Capitol Hill scorekeeper on tax proposals, the Joint Committee on Taxation, has invested a lot of time and money developing an explicitly dynamic scoring model that does take into account the feedback between taxation and economic growth. In the Joint Committee’s “Dynamic Stochastic General Equilibrium” model, lower taxes prompt workers to work longer hours and businesses to invest more, just as Republicans claim. After incorporating these types of effects, the model spits out multi-year predictions for G.D.P., tax revenues, and other variables.
On Thursday afternoon, just hours before McConnell was due to ask the full Senate to vote on a final version of the Republican bill, the Joint Committee issued its official analysis of the plan. The analysis—based on a preliminary version of the bill—incorporated the results from three different models: the committee’s traditional macroeconomic model; its newer dynamic one; and a third model, also dynamic, which it leased from a private consulting firm. After averaging the results from all of these models, the Joint Committee estimated that, over the next ten years, the bill would boost the level of G.D.P. by about 0.9 per cent, expand the capital stock by 1.1 per cent, and increase the budget deficit by about a trillion dollars ($1,006,700,000.00, to be precise).
In brief, the Joint Committee said that the tax cuts contained in the Senate bill would have a very modest impact on growth, and it eviscerated the claim that the bill would pay for itself. Between 2018 and 2027, the analysis concluded, the legislation would reduce tax revenues by $1.41 trillion on a conventional accounting basis. Additional G.D.P. growth would generate new tax revenues by $407.5 billion. If you subtract the second figure from the first, you get the net cost of roughly a trillion dollars.
One way to interpret these figures is to say that additional economic growth would pay for less than a third of the tax cuts in the Republican bill. The rest of the cost would have to be financed through borrowing: the U.S. Treasury would issue an additional trillion dollars in Treasury bonds, which would be sold to domestic and foreign investors. As a result of all this additional debt issuance, according to a separate estimate from the Committee for a Responsible Federal Budget, the debt-to-G.D.P. ratio would rise from its current level of seventy-six per cent to ninety-seven per cent in 2027.
As with any economic analysis, there are various ways to query the Joint Committee’s report. On Thursday night, some G.O.P. officials were busy dismissing the claim that the tax cuts would raise G.D.P. by just 0.8 per cent over ten years. Earlier this week, a group of leading Republican economists claimed that the Republican proposals would boost the level of G.D.P. by between three and four per cent, which is more than four times as large as the Joint Committee’s estimate.
But the modest G.D.P. estimate from the Joint Committee is in line with the results generated by another explicitly dynamic economic model, the Penn Wharton Budget Model, and it also jibes with intuition. As the Joint Committee explained, the temporary nature of some of the Republican tax cuts, particularly the personal ones, is likely to limit their impact on spending and G.D.P. growth. Moreover, because the economy is already close to conventional estimates of full employment, any surge in G.D.P. would most likely prompt the Federal Reserve to raise interest rates more aggressively, which would reduce investment and G.D.P. growth in subsequent years.
The details of the Joint Committee’s analysis are complicated, and some conservative economists will continue to quibble with them. But the big story is straightforward. Using dynamic scoring, the official Capitol Hill scorekeeper has confirmed what most people already knew: whopping tax cuts don’t pay for themselves.