This is the second of a series of columns by John Edward, who teaches economics at Bentley and UMass Lowell, on economic issues related to the upcoming presidential election. The first column, “The 100 Percent,” appeared on May 16, 2016.
Here is the simple formula for “making America great again.” Drastically reduce personal income taxes. Cut the corporate income tax rate by more than half. Eliminate the estate tax. Best of all, be assured that this tax reform “Doesn’t add to our debt and deficit, which are already too large” (according to the Trump for President web site).
A little historical perspective would be instructive — first regarding our debt and deficit.
According to boxofficemojo.com, Star Wars: The Force Awakens is the biggest domestic box office movie of all time. However, adjusted for inflation, Gone with the Wind is still way ahead.
Our national debt, at nineteen and a quarter trillion dollars is larger than ever. A few years ago federal budget deficits exceeded a trillion dollars – the largest by far. They are large by any measure, but the best way to measure is relative to the size of the economy.
Our national debt is now a little over 100 percent of Gross Domestic Product (GDP). That is high, too high. However, it has been much higher.
National debt was over 120 percent of GDP during World War II. That was way too high, but we had a reason, and we recovered very nicely.
In fact we recovered so well that by the time Ronald Reagan took office as President, national debt was only 32 percent of GDP. The federal budget deficit in 1980 was $74 billion, about 2.5 percent of GDP.
Now some more historical perspective — this time focusing on “Voodoo Economics.”
Ronald Reagan’s formula for a new “Morning in America” was simple. He ran for president promising to cut taxes, cut spending, and eliminate the budget deficit.
He only delivered on one out of three – cutting taxes. Budget deficits as a percentage of GDP doubled during the Reagan administration. By the time Reagan and his successor, George H.W. Bush (the originator of the Voodoo Economics phrase), were done, the national debt as a percentage of GDP had doubled. See Reaganomics for more.
Now on to Voodoo Two, or Donald Trump’s claims that his tax plan would be revenue neutral and that “we will be balancing budgets.” According to the Tax Foundation (usually referred to as pro-business) his plan would reduce revenue by $10 trillion over ten years. That is after assuming the tax cuts will increase economic activity, a premise that is uncertain.
A separate analysis by the Tax Policy Center estimated a $9.5 million reduction in revenue. They also pointed out that the increased government borrowing would drive up interest rates and therefore suppress private investment (commonly referred to as the “crowding out” effect).
Citizens for Tax Justice (CTJ) estimate a $12 trillion reduction in revenue, again over a decade. Candidate Trump has been vague on spending cuts. CTJ points out that discretionary federal spending, which includes national defense, would have to be cut by 94 percent to match the revenue reductions.
As summarized by FactCheck.org: “We take no position on the merits of Trump’s tax plan. But Trump has failed to provide evidence that he can keep his promise to cut taxes at the level he has proposed and raise enough new revenue elsewhere to make his plan revenue neutral.”
Even before tax cuts the national debt is already projected to increase by $10 trillion over the next ten years. Therefore, Trump’s tax plan could double the national debt in ten years. It is déjà vu (or Voodoo) all over again.
The counter-argument from the Trump camp is that these analyses underestimate the economic impact of lower taxes. According to the Trump for President web site: “These lower rates will provide a tremendous stimulus for the economy – significant GDP growth.” At best Trump’s claims are wildly exaggerated. Sorcery comes to mind.
As observed in the Tax Policy Center analysis: “Examination of particular historical examples of tax reform… suggest little impact of taxes on growth.” For example, the Congressional Budget Office analyzed the tax cuts of 2001 and 2003 and found they had only “modest” economic effects.
A few years ago the Tax Foundation published a review of research on the link between taxes and growth. They tried to make the claim that a majority of the studies would argue that lower taxes would promote economic growth (again, they are pro-business). In response the Center on Budget and Policy Priorities (CBPP) pointed out that the Tax Foundation had mischaracterized results, ignored more recent studies, in one case ignoring a study that refuted the author’s own earlier analysis.
CBPPs conclusion appeals to common economic sense: “the proper answer to a question as broad as whether tax increases are ‘positive’ or ‘negative’ for growth is: ‘It depends.’” As an example they cite: “Some tax increases to finance investments such as deficit reduction and education are associated with increased economic growth.”
On the other side we have Hillary Clinton. Her husband balanced the federal budget as President. She is making investments in education a centerpiece of her campaign.
An informed voter is our best citizen.
Next up: how much will that wall along the Mexico border cost us?