Long before it mastered the mass production of “fake news,” the Republican Party propagated its Ur-lie that “tax cuts pay for themselves.” Almost from the moment that Arthur Laffer first sketched his now-famous curve on a napkin in 1974, right-wing pundits, politicians, and propagandists have declared as an article of faith the belief that tax cuts incentivize so much economic growth that revenues to Uncle Sam will be at least as high as they would have been without the reduction in rates.
Unfortunately for the American people, four decades of supply-side snake oil have produced only mushrooming national debt and record-high income inequality. Far from paying for themselves, the Reagan and Bush tax cuts delivered a windfall only for the wealthy while unleashing oceans of red ink from the United States Treasury. (Of course, the other objective of draining Washington’s coffers in order to add to the bulging bank accounts of the rich was to get government “down to the size where we can drown it in the bathtub.”) It’s no wonder that by 2015 even Keith Hall, the man hand-picked by the Republican majority on Capitol Hill to head the nonpartisan Congressional Budget Office (CBO), acknowledged the obvious:
“No, the evidence is that tax cuts do not pay for themselves. And our models that we're doing, our macroeconomic effects, show that."
Nevertheless, this week Treasury Secretary Steve Mnuchin unveiled the Trump administration’s tax plan by proclaiming the fiscal equivalent of saying the sun rises in the west and sets in the east. Six days after first announcing “the plan will pay for itself with growth,” Mnuchin told the White House press corps:
“This will pay for itself with growth and with the reduction of different deductions and closing loopholes.”
In reality, it won’t even be close.
After all, Trump’s 500-word outline released this week largely follows the third of the three different versions he promoted during the 2016 campaign, and that plan was forecast by the nonpartisan Tax Policy Center to cost $6.2 trillion over the next decade. The Committee for a Responsible Federal Budget (CRFB) measured the hemorrhaging at $5.3 trillion. Even the conservative-friendly Tax Foundation with its very optimistic dynamic scoring put the loss at between $2.6 and $3.9 trillion over 10 years.
There’s no mystery as to why.
Trump’s 500-word “tax plan” could cost Uncle Sam over $6 trillion in new red ink.
Trump’s plan slashes the statutory corporate tax rate from 35 to 15 percent, a reduction that also happens to benefit partnerships and so-called “pass-through” businesses—like his own. That change alone will cost an estimated $2 trillion over a decade, and as the Tax Foundation admitted, cannot generate sufficient additional economic growth to be anywhere near self-financing. The president wants to condense America’s current seven tax brackets to three of 10, 25, and 35 percent. In addition to that tax cut from 39.6 percent for families earning over $450,000 a year, Trump would reduce the top rate for capital gains and dividends from 23.8 to 20 percent. The elimination of the estate tax and the alternative minimum tax would also benefit the wealthiest families in America, including Trump’s own. Aside from the tax breaks for charitable giving and the mortgage interest deduction, the White House would end most deductions and loopholes even as it doubles the standard deduction. All told, the Center on Budget and Policy Priorities (CBPP) previously warned, Donald Trump’s “phenomenal” tax plan would deliver almost half (48 percent) of its benefits to millionaires while adding trillions in new deficits.
Still, all week Secretary Mnuchin has been repeating his mantra that “the tax plan will pay for itself through economic growth.” And if you have that sickening feeling that you’ve heard this one before, that’s because you have.
After all, to one degree or another, pretty much every major Republican tax cut scheme (from Reagan in 1980, Dole in 1996, Bush in 2000, to Mitt Romney in 2012 and Paul Ryan's "Path to Prosperity" budget) has claimed that the hemorrhage of revenue for the U.S. Treasury from their gargantuan tax-cut windfalls for the gilded class would be offset by bigger collections from a supposedly surging economy. Without resorting to the sleight of hand that is “dynamic scoring,” these GOP budgets invariably produce red ink as far as the eye can see. That's why the House and Senate Republican majorities in 2015 required that the CBO estimates also use dynamic scoring to incorporate "supply-side assumptions about the growth-generating magic of tax cuts into official budget estimates, enabling conservatives to evade the deficit-boosting implications (and various congressional barriers that come along with them) of their pet proposals for reducing the tax burden of 'job creators.'"
Most analysts have encouraged the Congressional Budget Office and other forecasters to tread carefully in its use of dynamic scoring for two very compelling reasons. First, there's no consensus on how to model it, making the process ripe for manipulation and political chicanery. As former deputy assistant director for tax policy at the Congressional Budget Office and current fellow at the Tax Policy Center Roberton Williams warned:
We really don't understand the science well enough to do it right. The assumption built into the model determines, in large part, what comes out of the model. There's going to be conflict unless there's some agreement on what ought to go in.
But it's not just that "there's a great deal of uncertainty" about "the right way to model things," as TPC's Donald Marron put it. There's also the matter of the historical record: For more than 30 years, bogus conservative claims about the revenue-increasing effects of tax cuts have been proven cataclysmically wrong.
Starting, it turns out, with Ronald Reagan. As most analysts predicted, Reagan's massive $749 billion supply-side tax cuts in 1981 quickly produced even more massive annual budget deficits. Combined with his rapid increase in defense spending, Reagan delivered not the balanced budgets he promised, but record-setting debt. Even his OMB alchemist David Stockman could not obscure the disaster with his famous "rosy scenarios."
Forced to raise taxes 11 times to avert financial catastrophe, the Gipper nonetheless presided over a tripling of the American national debt to nearly $3 trillion. By the time he left office in 1989, Ronald Reagan more than equaled the entire debt burden produced by the previous 200 years of American history. It's no wonder that three decades after he concluded "the supply-siders have gone too far," former Arthur Laffer acolyte and Reagan budget chief David Stockman lamented:
[The] debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts.
Alternately, conservatives like Trump ally and Heritage Foundation economist Stephen Moore have simply rewritten history. Moore, whose op-eds have been banned by the Kansas City Star due to his past misuses of data, proclaimed:
Contrary to the claims of voodoo, the government's budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 -- close to a 75 percent change (25 percent after inflation).
Sadly for Moore, the numbers show that federal tax receipts grew faster both before and after Reagan. As Paul Krugman explained:
Real revenue growth 36 percent in the 8 years before Reagan, 26 percent under Reagan, 28 percent in the years following.
The history of the Bush years, too, shows that the arc of the Laffer Curve is short but bends toward fiscal catastrophe.
As CNBC summed it up, tax cuts only pay for themselves “in fairyland.”
Inheriting a federal budget in the black and a CBO forecast for a $5.6 trillion surplus over 10 years, Bush quickly set about dismantling the progress made under Bill Clinton. In 2001, Bush signed a $1.4 trillion tax cut, followed by another $550 billion round in 2003, the first war-time tax cut in modern American history. (It is more than a little ironic that Paul Ryan at the time called the tax cuts "too small" because he believed the estimated surplus Bush would later eviscerate would be even larger than predicted.) In keeping with Republican orthodoxy that "tax cuts pay for themselves," Bush confidently proclaimed:
You cut taxes and the tax revenues increase.
As it turned out, not so much.
Inflation-adjusted tax revenue fell after the Bush tax cuts of 2001 and 2003.
Federal revenue did not return to its pre-Bush tax cut level until 2006. As a share of American GDP, tax revenues peaked in 2000—that is, before the Bush tax cuts of 2001 and 2003.
Analyses in 2010 by the Center on Budget and Policy Priorities concluded (see charts at top) that the Bush tax cuts accounted for half of the deficits during his tenure, and if made permanent, over the next decade would cost the U.S. Treasury more than Iraq, Afghanistan, the recession, TARP, and the stimulus—combined. By the time he shuffled out of the Oval Office in January 2009, Bush bequeathed a $3.5 trillion budget and a $1.2 trillion annual deficit to his successor, Barack Obama.
The biggest factor in the debt added during the Bush years? Tax cuts.
Republican leaders were warned, but they persisted. "It's not the marginal tax rates,” future House Speaker John Boehner declared in 2010, “That's not what led to the budget deficit.”
“The revenue problem we have today is a result of what happened in the economic collapse some 18 months ago.
We've seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes.”
And as the Republican Party waged its all-out attack in 2010 to preserve the Bush tax cuts for the wealthy, the GOP's No. 2 man in the Senate provided the talking point to help sell the $70 billion annual giveaway to America's rich. "You should never," Arizona's Jon Kyl declared, "have to offset the cost of a deliberate decision to reduce tax rates on Americans." For his part, Senate Minority Leader Mitch McConnell rushed to defend Kyl's fuzzy math:
"There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."
But Republican agreement on that myth didn’t—and still doesn’t—make it true.
Current conservative economic propagandist and former McCain economic adviser Douglas Holtz-Eakin couldn't make the dynamic scoring alchemy work for the Bush administration, either:
In 2003, Doug Holtz-Eakin was appointed by Republicans to lead the CBO during the Bush years, and he came under intense pressure to use more dynamic analyses. But studies he commissioned found that dynamic scoring was devilishly complicated and wouldn't lead to drastically different estimates. As he explained in a 2011 hearing before the House Ways and Means Committee, "it is unlikely to change the bottom line very much over the budget window."
Despite the bitter experience of the Bush years, Mitt Romney made the same GOP shell game part of his tax plan in 2012. As Ezra Klein suggested in "The Dynamic Dodge in Romney's Budget,” Romney's scheme once again resurrected David Stockman's "magic asterisk:"
As a matter of theory, stronger economic growth could make Romney's plan work...if Romney really could double or triple the pace of economic growth, it would be much easier to make his numbers add up...
The technical term for the secret sauce that Romney is using in his budget projections is "dynamic scoring." The idea is that tax cuts make the economy grow faster. They make people work harder. They persuade rich people to stop hiding money away. And thus they don't cost as much as a "static analysis" -- one that didn't take into account all these effects -- would suggest.
As it turns out, Romney's 20 percent tax cut plan was basically the same one Bob Dole ran on—and lost on—in 1996. And the architect of that debacle, former Reagan Treasury official Bruce Bartlett, has long since recanted his support for the "dynamic scoring" at the heart of virtually every Republican tax plan. As Bartlett put it in 2012:
As the budget deficit increasingly inhibits Republicans' tax-cutting, they are planning ahead for tax cuts that they will insist are costless because they will so massively increase growth. But for that approach to work, the C.B.O. and the Joint Committee on Taxation, Congress's official budget and tax estimators, need to be forced to play along...
My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting...In other words, it is an issue of credibility. Republicans don't really care about accurate revenue estimates; they just want them to show that tax cuts pay for themselves, so they can pass more of them without constraint.
Constraints, that is, like the facts, the truth, and the unchangeable principles of basic math. That's why Paul Ryan wanted to rename the new math he and his GOP friends demanded the Congressional Budget Office use beginning in 2015:
He also noted that he prefers the term 'reality-based scoring' over 'dynamic scoring.'
Fast forward to 2017 and Team Trump’s tax plan rolled out by Steve Mnuchin this week. “There’s not a shred of evidence to support the Secretary’s ‘pay-for-itself’ claim,” former Obama White House economist Jared Bernstein rightly concluded:
“Sure, significantly faster growth would spin off more revenues. But there’s simply no empirical linkage between tax cuts and growth that’s both a lot faster and sustained.”
Bernstein is spot on. It’s not just that the U.S. economy almost always does better under Democratic presidents (Barack Obama was no exception). As the historical record shows, America has enjoyed faster economic growth, higher incomes, and greater job creation when taxes are higher—even much higher. And Bernstein has plenty of company in rejecting the immaculate misconception that is the Laffer Curve. A 2012 survey of many of the nation's leading economists conducted by the University of Chicago Booth School of Business gave Laffer’s thesis an "F." In a nutshell, not a single one of the economists surveyed agreed that "a cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut."
In his comments, David Autor of MIT pointed out, "Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer." Former Obama administration economist and current University of Chicago professor Austan Goolsbee put it this way:
Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already.
Zero economists surveyed agreed that tax cuts pay for themselves.
But for Donald Trump and his most ardent water carriers, no amount of evidence to the contrary is ever enough to admit an error, no matter how comical that mistake might be. Tax and budget policy is no exception to that rule. That’s why candidate Trump promised his tax plan is “going to cost me a fortune—which is actually true.” (It isn’t.) That’s why the 45th president of the United States pledged he could eliminate the entire national debt “over a period of eight years,” a guarantee even his extremist OMB chief Mick Mulvaney called “hyperbole.” (Promising to cut federal spending by 80 to 90 percent would be virtually impossible—and an act of national economic suicide.) Despite Steve Mnuchin’s commitment that “any reductions we have in upper-income taxes will be offset by less deductions, so there will be no absolute tax cut for the upper class,” there simply is no “Deduction Fairy.” As for Team Trump’s boast that his program of mammoth upper-class tax cuts will “pay for itself,” that too is only possible in “fairyland.” If these pathetically preposterous claims weren’t so dangerous, they’d be laughers.
Like the man himself. Proudly reviewing the Trump tax plan he helped influence, Arthur Laffer on Wednesday announced his strong support:
“It’s a slam dunk. It’s a no-brainer.”
Of course, eight years ago Arthur Laffer had another message that foreshadowed this tax plan—and the president who proposed it. “You really can't collect much money from upper-income people,” Laffer proclaimed, “They know how to get around taxes.”
