Economists are skeptical that growth will finance tax cuts

May 03, 2017

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Last week, US President Donald Trump and his administration outlined a series of tax-reform measures that could have a dramatic impact on the United States’ fiscal policy for the foreseeable future. The reforms were largely oriented toward simplifying the tax code and lowering tax rates, and included dropping the corporate tax rate from 35 percent to 15 percent—a rate that would also apply to pass-through businesses—and lowering the top individual income tax bracket from 39.6 percent to 35 percent.

Treasury Secretary Steven Mnuchin has said the plan “will pay for itself with growth and with reduction of different deductions and closing loopholes”—logic that has been used to justify tax cuts since at least the administration of President Ronald Reagan. But does the economic growth generated by tax cuts typically generate enough new tax revenue to offset the revenues lost to lower rates? Are Trump’s tax cuts likely to “pay for themselves”?

Chicago Booth’s Initiative on Global Markets put those questions to its US Economic Experts Panel. Seventy-two percent of the panel agrees that when policy makers count on growth to finance tax cuts, tax revenues actually fall as a percentage of GDP. Moreover, 84 percent of the panel finds it unlikely that Trump’s tax plan will pay for itself via economic growth.

David Autor, MIT
“Not a shred of evidence that US tax cuts pay for themselves.”
Response: Strongly agree

Anil K Kashyap, Chicago Booth
“Maybe when marginal rates are 90-percent-plus you can cut them and have them self fund, but not true in the more recent era.”
Response: Agree

Richard Thaler, Chicago Booth
“Question has one word too many: ‘invariably.’ Replace that with nearly always and I am all in.”
Response: Uncertain
 

Austan Goolsbee, Chicago Booth
“No, but it would put us in the running for a national Darwin Award.”
Response: Strongly disagree

Oliver Hart, Harvard
“We do not have the details of the plan, but it is very implausible that it would pay for itself.”
Response: Strongly disagree

Kenneth Judd, Stanford
“One point: eliminating the state tax deduction will increase voters' tax burdens from education. That will hurt growth.”
Response: Strongly agree