The GOP must choose between faith and evidence in tax-cut vote

Key Points
  • As Republican senators draw closer to a vote, the GOP must confront its long-held belief that tax cuts can fuel economic growth.
  • Analysis by economists on both sides of the aisle has shown that no modern tax cut has ever "paid for itself."
  • But GOP lawmakers and the White House are still trying to nail down their first legislative victory of the Trump administration.
Senate Majority Leader Sen. Mitch McConnell (R-KY) (R) listens to Sen. Orrin Hatch (R-UT) (2nd R) as they attend a press event on tax reform with Speaker of the House Rep. Paul Ryan and other congressional Republicans September 27, 2017 at the Capitol in Washington, DC.
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As much as they hoped to avoid it, Republican senators considering their tax-cut votes now face a clear-cut choice between faith and evidence.

Faith in tax cuts as the path to economic growth has reigned supreme within Republican theology since President Ronald Reagan. The party clings so strongly to this belief that it has become the answer to competing concerns over the national debt; growth sparked by tax cuts, insist White House officials and GOP leaders, will reduce, not increase, annual budget deficits.

Evidence for that belief has long been weak. On Thursday, it got even weaker.

Analyses by economists in both parties have shown that no tax cut in modern history has ever "paid for itself" by generating a surge in revenues. Reagan's tax cuts, like President George W. Bush's 20 years later, made deficits bigger.

After years of railing against the rising national debt, self-styled Republican "deficit hawks" vowed that this time will be different. Sen. Bob Corker of Tennessee, for example, has insisted he won't back a tax cut that adds even a penny to long-run debt.

His argument has been driven by a very specific chain of logic involving budget assumptions and forecasting methods. At the end of that chain was the expectation of generating $1 trillion in new tax revenues to replace what would be lost from the tax cuts themselves.

The conservative Tax Foundation first gave comfort to Corker and other Republicans by projecting the Senate bill would generate that needed $1 trillion. But the foundation's aggressive forecasting approach makes it an outlier among forecasters.

Then the Penn-Wharton budget model, run by a former economist from the second Bush administration, delivered a more sobering model. It projected much smaller economic growth, partly because of the drag from higher deficits and interest rates.

At best, Penn-Wharton showed, the Senate bill would generate barely one-third of the revenue needed to keep deficits from rising – and at worst one-tenth that amount. Top economists surveyed by the University of Chicago business school overwhelmingly predicted weak growth and much higher debt.

On Thursday, the tax analysts whom Congress pays to provide impartial advice delivered a similar verdict. And it came despite using the new forecasting methods Republicans have insisted on, which produce results more favorable to their arguments.

Traditionally the nonpartisan Joint Committee on Taxation has analyzed tax legislation on a "static" basis, not attempting to account for changes in economic activity. Because they believe tax cuts spur substantial growth, GOP congressional leaders demanded "dynamic" analysis that seeks to account for those changes.

Eager for action in any event, Senate GOP leaders pushed to pass their bill this week even without the kind of analysis it has previously insisted on. Treasury Secretary Steve Mnuchin promised to publish a dynamic score from his department's tax specialists but has failed to do so.

Now the JCT has given Republicans expert in-house analysis whether they want it or not.

It shows the Senate bill would spark only modest growth, increasing the size of the economy less than 1 percent over 10 years. That growth, JCT calculates, would generate $458 billion in additional revenues.

But JCT analysts say higher deficits and interest rates would stick the government with $50 billion in higher debt service, offsetting the extra revenue. Their bottom-line conclusion: The Senate bill would hike red ink by $1 trillion over 10 years.

Thus Republican lawmakers' own expert analysts, using Republicans' preferred methods, say the Senate bill would cross the line that Corker and some others others say it cannot cross with their support.

"This bill, if passed as is, would in fact increase the deficit and therefore the national debt," said Kent Smetters, the former Bush administration economist who directs the Penn-Wharton model.

That may not stop anyone from supporting the bill. Lacking major accomplishments during President Donald Trump's first year, Republican lawmakers worry openly that failure to pass it would dry up campaign donations and imperil their House and Senate majorities in 2018.

As a result, the immediate Republican reaction to JCT's conclusions was to question them. Sen. Charles Grassley of Iowa called the committee's approach "too conservative," a vestige of its old "bureaucratic" resistance to dynamic scoring.

On MSNBC, Sen. Mike Rounds of South Dakota flatly rejected the tax experts' conclusion that tax cuts won't produce the needed economic growth. He explained: "We really do believe."

Correction: This story was revised to correct that the Joint Committee on Taxation has projected that higher deficits and interest rates would mean $50 billion in increased debt service. An earlier version misstated the amount of debt.