As you may have seen, Donald Trump has a new campaign ad touting the economic benefits of his tax proposals — but the ad cites analyses of tax plans he doesn’t actually support.
Trump’s ad relies on two analyses by the conservative Tax Foundation.* One attempted to measure the economic effects of a House Republican tax plan Trump has not endorsed, while the other looked at the tax plan Trump released last fall and subsequently withdrew, deciding the tax rate cuts were too sharp.
In a statement to NBC News, a Trump policy adviser said Trump’s new ideas about tax policy — and especially corporate tax policy — are close enough to his old ones that they expect the economic effects would be about the same, which is why they relied on the old studies.
In fairness to Trump, it’s not possible to do a rigorous analysis of his new tax plan — because he doesn’t have one.
Trump outlined broad strokes about tax policy in a speech earlier this month, including a top income-tax rate 0f 33%, higher than the 25% in his withdrawn plan from last fall but lower than today’s 39.6%. But he hasn’t given enough detail about the plan to figure out how much revenue it would collect, let alone how it would affect the economy.
I’d add another reason not to wish for a new analysis: The Tax Foundation’s estimates of economic effects from tax changes are comically rosy, even given accurate inputs about what tax policy a candidate supports.
I wrote back in 2015 for The New York Times about the Tax Foundation’s claim that a tax-cutting plan from Sens. Marco Rubio and Mike Lee’s would have strongly positive effects on economic growth, to the extent that tax revenues would be higher after a decade than if you hadn’t cut taxes at all. The finding became much less impressive when you looked under the hood of the economic model:
“The optimistic results come mostly from assumptions about business investment being wildly responsive to tax policy. Its report found Rubio-Lee would add nearly 50 per cent to the business capital stock inside a decade, over and above how much it would have grown absent any change in tax cuts. In other words, if businesses would own two of something under current policy — aeroplanes, buildings, machines, whatever — they would, on average, go out and buy a third one because of the investment tax cuts in Rubio-Lee.”
“You might think a cut in taxes on investment would increase returns to investors in the long run. But the Tax Foundation’s model says that isn’t so — instead, it assumes investment would rise as much as was necessary to bid down pretax returns so that after-tax returns were unchanged. For example, automakers would pay a lower tax rate, but they’d make more cars, flooding the market until profit margins fell enough to fully offset the benefits of the tax cut.”
The House Republican economic plan, Trump’s old tax plan, and his new proposal all involve large cuts in tax rates on capital. So Trump’s adviser is probably right that the Tax Foundation model would find the new plan (whatever its granular details) would cause lots of economic growth, for the same reason it found Rubio’s would. But in each case, the model’s result is not meaningful.
In 2015, I spoke with public finance economists from across the political spectrum about the Tax Foundation model as applied to Rubio’s plan, and they all told me this assumption about the extreme response of capital is unreasonable. It might be reasonable as applied to a very small country with a very open economy, where tax policy changes could unleash a flood of foreign investment capital.
But the United States is too big for that to work. It takes time to drastically increase the amount of business capital and to find a domestic consumer base for whatever you make with that capital. Plus, models of rapid economic change based on tax policy depend on the ability to attract foreign investment and export products to foreign consumers, and Trump says he will impose new trade barriers at the same time he cuts taxes.
There is no such thing as a perfect economic model. Among economists, the question of how taxes affect the economy is a subject of great uncertainty and controversy. Often, the economic effect of a tax policy change will have a clear sign and an unclear magnitude: lower tax rates cause people to work more, but different economists and different empirical studies will disagree about how much more.
But while these questions often have many answers that might be right, there are still some answers that are clearly wrong. The Tax Foundation’s assumptions about how taxes affect workers’ behaviour are aggressive, but within the range of variable opinion among economists. But the assumption about business capital investment — the assumption that leads to such rosy economic effects from corporate tax cuts — is too aggressive to take seriously.
Maybe, Trump will eventually release enough detail about his new tax plan for the Tax Foundation to analyse it. But their finding about how his plan will affect jobs and the economy still won’t be meaningful.
*Disclosure note: I worked at the Tax Foundation for a year, from 2008 to 2009.
This is an editorial. The opinions and conclusions expressed above are those of the author.
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