The Supply Side Redux

April 27, 2017, 12:13 PM UTC

Do tax cuts pay for themselves?

I’ve spent countless hours of a long career reporting on that question—tracking the story back to its origins on Arthur Laffer’s napkin in a Washington hotel in 1974; spending hours interviewing the colorful collection of characters who first peddled the idea, including the late Jude Wanniski, the late Robert Bartley, and the indefatigable Jack Kemp; following the conversion of Alan Greenspan, the apostasy of David Stockman, and the embrace by George W. Bush in rebellion against his father. I have read countless papers on both sides of the issue, and seen economic statistics tortured near death in defense of one side or the other.

So it is with some experience and a little weariness that I answer: it depends. Back in 1963 when the top personal tax rate was 91%, it is very likely the Laffer Curve held, and cutting exorbitantly high rates led to more revenue, not less, by increasing incentives to work and invest. It’s also true that for certain taxes that easily can be avoided—like the tax on capital gains (you don’t have to pay if you don’t sell the asset) or the tax on overseas earnings (you don’t have to pay if you don’t bring the money home)—a targeted tax cut can coax out more revenue.

But will Donald Trump’s exceedingly generous tax cut plan, unveiled in outline form yesterday, stimulate the economy enough to offset the trillions of dollars it would lose in a static revenue analysis? Economics is a notoriously imprecise science, because it relies on human behavior; but all the economic evidence I’ve seen suggests that is extremely unlikely. And by “extremely unlikely,” I mean: it’s not going to happen.

Stephen Moore, who has long plowed these fields and is an on-again-off-again adviser to Trump, makes the best possible case for the argument in a piece yesterday on The Wall Street Journal‘s editorial page. He points out that the Congressional Budget Office is currently forecasting a grim average growth rate of 1.9% over the next 30 years. If a tax cut can boost that to 3%—still below the average growth rate between 1974 and 2001 of 3.3%—additional growth would eventually spin off an extra $2.5 trillion in revenue each year. Voila! Tax cuts paid for.

Problem is, that kind of growth requires not only a significant increase in productivity, but also a surge in new workers—a huge demographic challenge given the retirement of the baby boomers. Moore says the problem could be solved with an increase in immigration. But needless to say, he hasn’t sold Trump on that idea.

In any event, the real challenge President Trump now faces is convincing Congress that his math works. He would need sixty votes in the Senate to make the tax cut permanent—an impossibility given today’s partisan environment. He can do a temporary tax cut with Republican votes alone, but even getting them to agree will be a challenge. And a temporary tax cut, which gives companies little incentive to make long-term investments, is even less likely to have the kind of growth effect that Moore projects.

So don’t count your tax savings yet.

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