Must-Read: Matt O’Brien: For the last time: Tax cuts don’t pay for themselves

Must-Read: Matt O’Brien: For the last time: Tax cuts don’t pay for themselves: “Republican politicians will pretend their tax cuts will largely pay for themselves, and… Republican economists will largely indulge them…

…Susan Collins (R-Maine). On Sunday, she seemed to suggest that, because of all the growth it would supposedly generate, the Senate’s $1.5 trillion tax cut bill wouldn’t actually cost a thing and might even “lower the debt.”… Collins said that three top Republican economists… Glenn Hubbard… Douglas Holtz-Eakin and… Larry Lindse… told her that something close to this was possible….

There are varying degrees of wishful thinking going on here. First, “no serious economist” thinks that tax cuts fully pay for themselves. Anyone who does is “detached from empirical reality.” That, at least, is what Holtz-Eakin—yes, one of the economists Collins talked to—said in April…. Most economists don’t think this is anywhere near a close call. “At best, according to the prevailing consensus, the positive feedback effect from tax cuts would recoup in the range of 25 percent to 35 percent of the cost,” wrote, you guessed it, Holtz-Eakin.

Which makes you wonder, then, why he and other Republican economists seem to think that the Senate plan might pay for… as much as 67 percent of its costs…. Their answers weren’t the most rigorous…. Holtz-Eakin… “it has elements that are atypical”… a territorial tax system… immediately deduct their investments…. Hubbard said that while he hadn’t run the numbers, the “feedback effects from corporate tax reform can be larger depending on the type of reform.” In other words, these are extra special tax cuts. Just take their word for it. You have to because there isn’t really an economic model that tells the same story they do. The only one that comes close is from the right-wing Tax Foundation, but, as I’ve reported, there are serious concerns about its methodology. Mainstream estimates, meanwhile… show… nowhere near the additional 3 percent to 4 percent jump that the Republican economists are predicting.

How do they come up with such optimistic numbers? Easy… assume the best and then say that if this scenario played out over the next 10 years—which it almost certainly wouldn’t—then these tax cuts really would add 0.3 to 0.4 percentage points to growth…. The Republican economists also seem to have misstated or misunderstood some of the studies that they claim show the economy would grow…. The point… is more about coming up with a case that these tax cuts would recoup much of their costs than it is about coming up with a convincing case  that they would—without, of course, explicitly saying so. Better to let the politicians make that leap….

We shouldn’t be having this debate again. We know that tax cuts don’t pay for themselves. Ronald Reagan’s didn’t in 1981, George W. Bush’s didn’t in 2001, and there’s no reason to think Donald Trump’s would…. And yet here we are playing the same game…. Republican politicians… trying to convince themselves that deficit-financed tax cuts would not be fiscally irresponsible… Republican economists are trying to come up with reasons that might be right…


Brad DeLong
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