In an updated analysis, the Tax Policy Center estimates that the House Republican leadership’s 2016 tax blueprint would reduce economic output by 0.5 percent by 2026 and add about $3.7 trillion to the nation’s debt over the coming decade. By 2036, the plan would shrink output by between 1 percent and 2.6 percent and add between $4.3 trillion and $5.5 trillion to the debt.
The new TPC estimates are dynamic scores that include the effects of the tax changes on the overall economy and, in turn, the effects of those economic changes on tax revenue. The increase in the debt reflects the revenue loss from the tax cuts and added interest from the additional government borrowing. It updates an analysis TPC published in April.
Measuring tax cuts four ways
TPC measured the cost of the tax cuts four ways. First, it used traditional budget scoring that reflects the way people and companies adjust behavior in response to tax changes, but does not account for the way broad economic changes affect revenues.
It then used three different dynamic models to analyze those overall economic effects on revenues--two internal and one external. All three showed that the House GOP plan would boost growth for the first few years but then slow the economy after that. The problem: Without offsetting tax increases or spending reductions, higher deficits would increase government debt and raise interest rates throughout the economy. Higher borrowing costs would more than wash out the benefits of the tax cuts themselves over the medium and long term.
The three models show somewhat different results, especially in the second decade, but the basic trends are the same: Slower growth and trillions of dollars in additional debt.
Growth effects
TPC started with a Keynesian model that assumes growth is primarily driven by demand. Thus, tax cuts increase demand which leads firms to boost production which raises economic output. Such changes generally last a few years, then disappear.
Because the Keynesian effects are temporary, TPC used a neoclassical growth model to look at longer-run economic changes. It assumes that over time, growth is determined by a mix of productivity and changes in the labor force. Thus, tax cuts that lead firms to increase their capital stock and encourage more people to work or work longer hours would increase economic output.
At the same time, TPC’s partners at the University of Pennsylvania’s Wharton School used their own proprietary macroeconomic model to update their estimates of the House GOP plan. The Penn Wharton Budget Model (PWBM) assumes that households make a series of choices about how much to work and save aimed at maximizing their economic well-being. Tax changes can affect those choices.
What did the modelers conclude?
Shrinking the economy
The TPC models and the Penn-Wharton model projected that the House GOP tax plan would shrink the economy by 0.5 percentage points by 2026. The TPC models found that the proposal would boost output from 2017-2019 then gradually slow the economy. PWBM found the House GOP proposal would increase output through 2021. After that, all the models showed the economy slowing.
What would the plan mean for the debt? Over the first 10 years, there was almost no difference among the models in the effects on the debt, no matter how the plan was scored. Whether TPC used traditional scoring or dynamic scoring, the plan would add about $3.7 trillion to the debt, including interest. Penn Wharton found almost exactly the same thing.
There were noticeable differences in the estimates over the period 2027-2036. Using standard scoring, TPC finds the House GOP plan would add $4.3 trillion to the debt. With macro effects, the plan would worsen the debt even more—by $4.9 trillion.
The Penn Wharton model shows an even more sluggish economy in the second 10 years: It calculates that the House GOP plan would reduce output by 2.6 percent by 2026. Thus, it would slash revenues by $3.4 trillion and, including added interest, raise the debt by $5.5 trillion.
No matter how you cut it, these four economic models show that the 2016 House GOP blueprint would slow economic growth and add trillions to the debt over the next decade and beyond.
