There is a good deal in the current campaign of candidates seeking the Republican presidential campaign that is worrying. When one of the main remaining candidates (Marco Rubio) tries to belittle one of the other candidates (Donald Trump) on national television by alluding to the size of his penis, one has to wonder. This would be considered juvenile even in a campaign for a high school class president. Yet one of these candidates will almost certainly receive the nomination of the Republican Party to be the President of the United States.
This blog seeks, however, to focus on economic issues. And a key economic issue in modern day political campaigns is what the candidate would seek to do, if elected to office, about tax policy. Major candidates have therefore set out detailed proposals while campaigning, with these proposals developed by teams of trusted advisors who are specialists in the area, and then put out by the candidate as what he (or she) would try to enact if elected.
The major Republican candidates have done this, and four of these (the proposals of Donald Trump, Ted Cruz, Marco Rubio, and Jeb Bush) have been analyzed in depth by the non-partisan Tax Policy Center (a joint center sponsored by the Urban Institute and the Brookings Institution). (The Tax Policy Center has also just recently issued similar analyses of the tax plans of Hillary Clinton and Bernie Sanders.)
Among the issues examined by the Tax Policy Center was what the impact would be on revenues collected of the Republican plans. This blog post will look at those estimates, and calculate what they imply for government expenditure cuts if, as each of the candidates insist, they would not allow deficits to rise. And what they imply is that these plans, like much else in this campaign, simply are not serious.
B. The Revenue Losses from the Republican Plans
The chart at the top of this post shows what the Tax Policy Center calculates the government revenue losses would be if the tax plans of the major Republican candidates were implemented. Ten year totals (for fiscal years 2017 to 2026) are shown rather than year by year numbers to keep things simple, even though the plans would still be ramping up in 2017 with the full impact not seen until 2018. The total revenue losses would range from $6.8 trillion for Bush as well as Rubio, to $8.6 trillion for Cruz, to $9.5 trillion for Trump.
To put this in perspective, the chart includes (on the right) the projected total government discretionary budget expenditures for all purposes other than defense over this same ten year period. The figures are from the most recent (January 2016) ten year budget forecasts of the Congressional Budget Office, and will exclude defense as well expenditures for mandatory programs (two-thirds of which are for Social Security and Medicare) and for interest on public debt.
Forecast non-defense discretionary expenditures total $6.5 trillion over this ten year period. This is less than what the revenue losses would be under any of the Republican plans. That is, even with the total elimination of government discretionary spending on everything other than defense, the deficit would increase. Yet these Republicans insist that their plans would not increase the deficit.
Cutting non-defense discretionary expenditures to zero is of course absurd. For those concerned with security, one should note there would be no more federal prisons, no more prosecutors, no FBI, no more border control. There would be no more federal disease control, no more federally funded medical research, no more federal support for infrastructure building or maintenance, no more NASA or supported science research, and so on. Everything would be eliminated, not just cut.
Taking this a step further, one can look at how much defense spending would need to be cut, on top of the elimination of all non-defense expenditure, to make up for the lost revenues:
The necessary cuts in the defense budget would range from 5% of forecast ten-year defense expenditures for Bush and Rubio, to 32% for Cruz, to 47% (!) for Trump. Yet Cruz, Rubio and Bush have all also called for sharp increases in defense spending. Ted Cruz has laid out an ambitious plan for a bigger military that an analyst at the conservative Cato Institute would cost an extra $2.6 trillion over eight years, an increase in defense spending of over 50%. Bush and Kasich have each proposed increases in defense spending of $1 trillion over ten years, an increase of over 15%. Rubio is also arguing for big (but unspecified) increases in defense spending. Things are perhaps less clear for Donald Trump, who has asserted he is “gonna build a military that’s gonna be much stronger than it is right now”, but “for a lot less”. How he would do this he does not say, and it is doubtful he would get a “much stronger” military if its budget is to be cut by close to half.
The Republican candidates assert their tax cut plans would not, however, lead to deficit increases, nor that they would cut defense spending (at least other than Trump). Rather, they would cut non-defense spending. However, as seen above, even if non-defense spending were cut to zero, budget deficits would increase unless there were also sharp cuts in mandatory programs (which are mostly Social Security and Medicare).
How do they believe they can do this? Because they assert their tax plans would lead to big, indeed miraculous, leaps in growth. Yet there is no evidence that such tax plans would do this. Indeed, they are so large that the disruption in finances would almost certainly have large negative consequences for growth.
Economic theory does suggest that tax systems can affect growth. The Tax Policy Center evaluations of the Republican tax plans, cited above, each have a balanced discussion of what they might be. But as they point out, one would expect from economic theory that there would be both positive and negative effects, offsetting each other to at least some degree, and that in any case the overall impact in either direction is likely to be small. What the net impact will be, and in what direction, is then an empirical question, and careful studies of historical examples of tax reforms suggests that the overall impact on growth is, indeed, small.
One also does not find any evidence in the US historical data that tax cuts lead to more rapid growth. As an earlier post on this blog found, federal taxes as a share of GDP were substantially lower in the decade following the Bush tax cuts of 2001 than for any decade in the previous half century, but this was not associated with higher GDP or jobs growth. Rather, it was associated with the lowest growth of GDP or jobs of any decade since at least the 1960s. Furthermore, one cannot find any indication that a reduction of the highest marginal income tax rate (a focus of the Republican tax plans) led to higher growth. The highest marginal federal income tax rate was 91 or 92% in the 1950s under Eisenhower, and always 70% or higher during the 1960s, but growth in GDP and in jobs during those periods were reasonably good, especially in comparison to what they have been since the Bush tax cuts of 2001. High marginal income tax rates in the 1950s and 1960s did not kill growth.
One should not then expect miracles. The Republican tax plans simply cannot be taken seriously. But perhaps I am being silly to expect that in this campaign for the presidency.