A Singularly Misplaced Concern About Tax Reform

Desmond Lachman, a well-respected resident fellow at the American Enterprise Institute, made a singularly fine observation recently when he wrote that a “deficit ballooning tax cut is a singularly bad idea.” Given the current budget deficit and growth projections in the coming years a massive tax cut as sound policy would indeed be a tough sell. Why Lachman felt it necessary make this observation is another matter entirely as, at the moment at least, no such tax cut is on the table. It certainly doesn’t describe the tax reform effort building steam in Congress.

Dr. Lachman apparently got himself worked up in the first place by an analysis by a leftish think tank suggesting the “Big Six” tax reform framework would reduce taxes by $2.2 trillion. It didn’t take much analysis to conclude this analysis was pure bunk, but apparently Dr. Lachman didn’t notice. Nor did he notice that the tax relief in the budget resolution currently being finalized in the Congress calls for $1.5 trillion in tax relief, not $2.2 trillion. To be sure, $1.5 trillion is still a lot of money, but it’s not an estimate. This is a parameter for the debate, and it’s about a third smaller than the figure produced by the bogus analysis. One third is a pretty big miss to have missed.

Had Dr. Lachman dug just a wee bit deeper, he would have seen that even the $1.5 trillion is a vast overstatement. For example, it is based off a revenue baseline including about $400 billion in tax extenders. One of these is 50% bonus depreciation for business equipment which the Joint Committee on Taxation estimates would cost about $240 billion over 10 years to make permanent. But tax reform builds on 100% depreciation, or expensing, so bonus depreciation is subsumed in tax reform. Most of the rest of the tax extenders are likely to be extended or replaced, taking tax reform’s budget hit prior to any growth feedback considerations to about $1.1 trillion.

As a resident fellow at AEI, surely Dr. Lachman is familiar with the economic growth arguments of his esteemed former colleague and now Council of Economic Advisers Chairman, Kevin Hassett. While economists will long quibble over growth effects, Hassett’s arguments in favor of tax reform’s ability to spur the economy in general rest on a basic principle with which Lachman’s previous work demonstrates strong agreement, namely that prices really do matter. In application, this means that tax reform that eliminates tax distortions tends to encourage economic activity.

Even when we have a passed bill in hand we will also have a range of estimated growth effects to choose from. However, as a table in the Analytical Perspectives volume of the President’s Budget makes clear, tax reform need only result in about 3% higher GDP over 10 years to more than offset the remaining static-estimated tax relief. Significant tax rate reduction, expensing, and an internationally competitive tax system should achieve at least that much and probably much more. In short, with so many other issues bubbling along, a deficit ballooning tax cut is probably one Dr. Lachman can take off his worry list.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.