Gale v. Moore
POLICIES FOR THE NEXT ADMINISTRATION. PART 9: ECONOMIC GROWTH
Response to Stephen Moore
By William G. Gale
Stephen Moore paints a picture of a world where large tax cuts, trade restrictions, and stricter immigration policies generate substantial economic growth. That vision is fantasy.
First, he genuflects to the Reagan tax cuts and the subsequent economic rebound. But the 1980s weren’t that exceptional. Growth from one business cycle peak in the late 1970s to the next in the late 1980s was pretty much average. In Reagan’s early years, the economy was rebounding from a steep recession, which typically leads to faster recoveries, in itself. Monetary policy brought interest rates way down, boosting investment. Higher federal and state and local spending as a share of the economy added to aggregate demand. And the 1981 tax cut lost so much revenue at first that policymakers had to reign it in with a significant tax increase in 1982.
Trump’s tax plan would create massive tax avoidance as high-income households shifted their income from wages — taxed at 33 percent — to business income taxed at 15 percent. Even after accounting for macroeconomic effects, Trump’s plan would not come close to increasing revenues, as Mr. Moore suggests, but instead would add more than $7 trillion to the debt over a decade and over $20 trillion after two decades, putting a significant drag on the economy.
Trump’s immigration proposals would further harm economic growth. The non-partisan Committee for a Responsible Federal Budget estimates that if all 11 million undocumented immigrants were removed under Trump’s plan, GDP growth could be 0.3 to 0.5 percent slower annually. Lower net immigration would also exacerbate Social Security’s insolvency.
Restricting trade is never a way to boost growth. In the worst case scenario, the United States would face a trade war similar to the one that helped us spiral into the Great Depression.
(For the opposing view, see Stephen Moore, "Trump Will Ignite an American Economic Boom.")
Response to William G. Gale
By Stephen Moore
William Gale's prescription for growth reminds me of the old Marx Brothers line: “Who you going to believe, me or your own two eyes?” He says there is no evidence that lowering tax rates doesn't produce growth. Every liberal economist in the nation argued that the Reagan tax cuts would not work. They predicted higher inflation, lower growth, higher interest rates, a falling dollar. Then the opposite happened. The same critics who Reagan (and Kennedy before him) proved dead wrong when the economy and stock market exploded then complained that growth was so fast that the economy would "overheat." What a great problem that would be today.
So Reagan cut taxes and Obama used the Gale approach. The Reagan recovery was nearly 4 percent; the Obama recovery has been less than 2 percent. Our GDP is $3 trillion behind where it would be if the economy were growing as fast as it did in the Reagan years.
The states also show the power of tax cuts over tax increases. As Arthur Laffer and I show in our book An Inquiry into the Nature and Causes of the Wealth of States, low-tax red states, such as Texas and Florida, have seen twice the migration and job growth of blue states, such as California and New York. Texas and Florida have no income taxes; New York and California have income taxes of roughly 9 percent and 13 percent, respectively. How many people have you ever met who moved from Florida to New York? From Texas to California? Similarly, three years ago Kansas cut taxes while Illinois and Connecticut raised them; Kansas has had better job growth than both states since.
America has one of the highest business taxes in the world, and we are losing our corporations. If tax rates don't matter, why is it that Ireland, Germany, Japan, Sweden and so many other countries have slashed their tax rates?
And if more federal spending leads to better educational achievement, how is it that the highest spending states and cities have the worst schools? How is it that after spending hundreds of billions of dollars on education at the federal level, test scores are hardly better today than 40 years ago? Here, again we should believe our own two eyes. Trump’s plan will give the money to parents through vouchers, not to the education bureaucrats. It's about time!
(For the opposing view, see William G. Gale, "An Agenda for Inclusive Growth.")
William G. Gale is the Miller Chair in Federal Economic Policy at the Brookings Institution and Codirector of the Urban-Brookings Tax Policy Center. The opinions are his own and do not necessarily represent the views of any organization.
Stephen Moore is a senior economic advisor to the Trump campaign and an economist with Freedom Works.