The GOP Tax Plan Is Pro-Growth
The Joint Committee on Taxation (JCT) has estimated that the Senate Republican tax bill would increase the size of the U.S. economy by 0.8 percent, on average, over the period 2018 to 2027. According to JCT, that extra economic growth would reduce the revenue loss from the legislation by $408 billion over the decade, relative to the static revenue loss that would occur without the additional growth. JCT estimates the net revenue loss from the tax bill at just over $1 trillion over 10 years.
Although the JCT report is generally good news for the GOP plan, some Republicans and Democrats haven’t seen it that way. They seem to think that the faster economic growth is an irrelevant side note because the tax bill would increase the federal budget deficit. That’s flat-out wrong. Sluggish growth and stagnant wages have been the primary problem for the U.S. economy for the past two decades, as many millions of American workers haven’t seen a pay increase in years. From 2010 to 2017, the U.S. economy grew at an average annual rate of 2.1 percent — well below the average annual rate of 3.3 percent growth from 1983 to 2008. Faster economic growth is the surest path to pushing up wages.
Republicans should welcome the JCT assessment as validation of their emphasis on stronger economic growth. Democrats have argued in recent years that the primary problem in the U.S. economy is the uneven distribution of income. President Obama made this argument in countless speeches, and his major policy initiatives were aimed at moving resources from the well-off to those with the lowest incomes. By contrast, Republicans have argued that no amount of redistribution can offset a persistently slow-growth economy. Workers want higher wages, not increased reliance on government benefits. Slow economic growth following the deep 2007–2009 recession likely helped Republicans win control of Congress and the White House last year.
The JCT report provides official confirmation that the GOP tax plan would spur economic activity. JCT forecasts that the Senate bill would lead companies to invest more in business expansion and workers to supply more labor to growing companies.
While the JCT’s estimate of the added economic growth from the tax bill is not large, it is still meaningful. JCT estimates that the tax bill would expand GDP by about 0.8 percent. In 2025, that suggests that GDP, projected to be $25.9 trillion under current law, would grow by about $200 billion. GDP would grow about 0.1 percentage point per year faster than it would under current law. JCT estimates this added growth would expand U.S. employment by 0.6 percent, or the equivalent of about 900,000 jobs today.
JCT’s report is the most important use of dynamic scoring since the concept was introduced in the budget process a decade ago. It also validates Republicans’ longstanding emphasis on the importance of using dynamic scoring in assessing the effects of major tax bills. With this estimate, dynamic scoring is no longer just a GOP hobby horse; it is a legitimate part of the budget process that both parties rely on to fully understand the economic and budgetary consequences of major tax policy changes.
Some Republicans in Congress were stung by the JCT report because they had argued the tax would pay for itself with faster economic growth and would not increase future budget deficits. But it was never realistic to think a major tax cut would be revenue-neutral. There is no evidence that prior tax cuts, including President Reagan’s in 1981, had this effect on federal revenue, and no credible model of tax policy and the U.S. economy today projects major tax rate cuts will pay for themselves. That particular GOP talking point — so often used by Republicans this year and in the past — is counterproductive and should have been retired some time ago.
The JCT report should spur Republicans to couple the tax bill with a credible and realistic plan for spending restraint.
The Congressional Budget Office (CBO) currently projects that the federal government will run a budget deficit of 5.6 percent of GDP in 2030. The JCT report implies that the Senate tax bill (assuming all of its key provisions are made permanent) would increase the deficit in 2030 by about 0.5 to 1 percent of GDP. Instead of promoting unrealistic expectations of tax cuts paying for themselves, Republicans — who want to be the party of limited government as well as lower taxes — should embrace the challenge of narrowing the deficit with spending restraint that exceeds the size of the tax cut over the medium and long term. The GOP should embrace sensible and gradual steps to slow the rate of growth of the major entitlement programs, which are the real sources of the expected rise in federal debt in coming years.
Combined with a credible plan of spending reduction, the GOP tax bill would generate even faster growth over the long-run than the tax bill would by itself, with more jobs and higher wages for workers. If Republicans adopted such a strategy, they would be in a better position to argue that they are doing all they can to move the country back toward its historical rate of economic growth.
James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute.