Democrats have been relentlessly attacking the pro-growth elements of the GOP tax bills, such as the corporate tax rate cuts. They label efforts to improve incentives for working and investment as “trickle-down economics.”
Here are some recent examples:
- Sen. Pat Leahy (here): “Even these huge corporate tax cuts are not structured in a way that would truly encourage investments here at home and boost workers’ wages.”
- Sen. Kirsten Gillibrand (here): “After the tax plan was released, a lot of talking heads on TV dredged up the talking points about the virtues of “trickle-down economics”—the myth that if only corporations had more money, it would help everyday American families.”
- Rep. Tim Ryan (here): “Instead of fixing our broken tax system, the so-called tax ‘reform’ legislation the Republican Majority just rushed through the House relies on the same supply-side, trickle-down economics that has failed in the past.”
- Rep. Nancy Pelosi (here): “Their trickle-down economics has always been in their DNA. It has never created jobs…”
The House and Senate tax bills include numerous provisions that will not spur growth. But there are plenty of supply side elements as well, and they received support in yesterday’s Joint Committee on Taxation (JCT) dynamic modeling report.
Here are a few findings:
- “Overall, the net effect of the changes to the individual income tax is to reduce average tax rates on wage income by about one percentage point, while reducing effective marginal tax rates on wages by about 2.4 percentage points.” The marginal rate cuts “provide strong incentives for an increase in labor supply.”
- “The projected increase in GDP during the budget window results both from an increase in labor supply, in response to the reduction in effective marginal tax rates on wages, and from an increase in investment in response to the reduction in the after-tax cost of capital.”
- “The macroeconomic estimate projects an increase in investment in the United States, both as a result of the proposals directly affecting taxation of foreign source income of U.S. multi-national corporations, and from the reduction in the after-tax cost of capital in the United States due to more general reductions in taxes on business income.”
So the JCT views GOP efforts to reduce marginal tax rates and improve investment incentives with favor. The problem is that many of the proposed tax changes would add to deficits and not spur growth, combined with the JCT’s off-base assumptions about “crowding out.” The JCT assumes large reductions in investment as deficits from tax cuts supposedly raise interest rates.
J.D. Foster challenges those assumptions here. He notes, “The national debt doubled, and then doubled again, under President’s George W. Bush and Barack Obama, respectively, while real interest rates remain astounding low.” Despite that, the JCT assumes that a modest increase in borrowing for tax cuts would raise interest rates so much that it would choke off investment.
That does not make sense. The solution is to combine tax cuts with spending cuts to limit deficits, and to focus more of the tax changes on pro-growth reforms.