By IPI President Tom Giovanetti.
Most of the major presidential candidates have released tax reform plans with enough specifics to run them through an economic model and
the Tax Foundation has done exactly that.
Tax policy can be evaluated by its impact on economic growth impact on federal revenues and distributional effects (who benefits the most?). Republicans tend to focus on economic growth while Democrats tend to focus on distributional effects. Both parties also care about revenue impacts though Democrats want more revenue and Republicans want less.
A fundamental belief of conservative tax reformers is that reducing certain taxes makes more capital available for investment which drives increased economic growth. And because a larger economy means more jobs and higher incomes for both individuals and corporations growth-oriented tax cuts have the potential to recover some portion of the lost revenue.
The Tax Foundations model attempts to estimate revenue impact and growth effects and the results are interesting:
- Jeb Bush would cut taxes by $3.6 trillion over ten years but an additional 10 percent increase in GDP would recover 56 percent of the revenue loss or just over $2 trillion.
- Ted Cruz would cut taxes by almost the same amount $3.6 trillion but an additional 13.9 percent increase in GDP would recover a whopping 79 percent of the revenue loss or $2.8 trillion.
- Marco Rubio would cut taxes by $$6 trillion over ten years but an additional 15 percent increase in GDP would recover 60 percent of the revenue loss or $3.6 trillion.
- Ben Carson would cut taxes by $5.6 trillion over ten years but an additional 16 percent increase in GDP would recover 56 percent of the revenue loss or $3.1 trillion.
- Donald Trump would cut taxes by almost $12 trillion over ten years. His plan would stimulate an additional 11.5 percent increase in GDP but because his tax cuts are not targeted at increasing investment his plan would recover only 15 percent of the revenue loss or $1.8 trillion.
All the Republican plans would increase federal deficits unless coupled with significant federal spending cuts the size of which would require reform of federal entitlement plans like Medicare and Social Security.
Hillary Clinton and Bernie Sanders on the other hand raise taxes and because their tax increases are targeted at investment would slow economic growth:
- Hillary Clinton would attempt to increase taxes by $500 billion over ten years but a 1 percent reduction in GDP means her plan would only raise taxes by $191 billion.
- Bernie Sanders would attempt to increase taxes by a breathtaking $13.5 trillion over ten years but the ensuing 10 percent reduction in GDP means his plan would only raise taxes by $9.8 trillion.
Trump and Sanders are obviously outliers and neither of their plans is realistic. Hillary Clinton proposes tweaks to the system that would have a slight negative impact while the remaining Republican candidates are all shooting for dramatically higher economic growth.
Though
the Ways & Means Committee also has a say in tax reform these comparisons give us some insight into the candidates priorities and
increased economic growth is certainly the right priority.
Todays TaxByte was written by IPI President Tom Giovanetti.
