The Tax Cut Is Highly Likely To Reduce Revenue

by Ramesh Ponnuru

Many Republicans, including Senate majority leader Mitch McConnell and Senator Susan Collins, have suggested that the tax cut will do so much to expand the economy that the new tax code will raise more revenue than the old one. This result is theoretically possible, but it is highly unlikely.

Several detailed attempts have been made to predict the effects of various versions of the Republican tax bill on revenue, and many of them have incorporated estimates of the effects on the economy. The Joint Committee on Taxation, the Penn Wharton Budget Model, the Tax Policy Center, and the Tax Foundation have all put forward their estimates. The last group, which is the most optimistic, found that the Senate Republican tax bill introduced a few weeks ago would cause revenue to be $516 billion lower over the next ten years. (The Senate passed an amended form of the bill this weekend.)

Collins, on Meet the Press on Sunday, cited several prominent Republican economists to bolster her contention that the tax cut would pay for itself and even lower the federal debt. None of them has said anything in public to that effect–they signed a joint statement saying that tax cuts will promote growth but not denying the conventional view that revenues will be lower as a result of the tax cuts–and two of them deny what she said. They say that the tax cut will raise economic growth and that this growth will soften the revenue hit to the federal government. But they predict that the federal government will take in less revenue if it cuts taxes than if it does not.

Proponents of tax cuts sometimes ignore the distinction between tax cuts that precede rising revenue and tax cuts that produce rising revenue. They see an increase in revenue after a tax cut as evidence that tax cuts have raised revenue. That’s a mistake because revenues might well have risen more without the tax cuts. Revenues usually rise from year to year, even accounting for inflation, because the economy usually grows. If we’re trying to figure out the effect of a tax cut on revenues, we need to know how much extra growth it is likely to generate.

Nobody who has tried to do a detailed estimate of the bill has concluded that it will generate enough extra growth to avoid a reduction in revenues of several hundred billion dollars over the next ten years. Perhaps in the end the Republican leaders who have faith that it will generate that much extra growth will be proven right, but they have provided no reason for anyone to share that faith.

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