Tax Cuts And The Deficit

Nov 22, 2017
Originally published on November 22, 2017 7:32 am
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Trump administration officials have been doing a lot of interviews lately trying to build support for the tax-cut bills now being debated in Congress. And they are facing a lot of skepticism. One of the questions they're having to answer is what the tax cuts will mean for the federal budget deficit. Here's NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: The federal government already spends a lot more than it takes in every year. And the tax cut bills Congress is considering threaten to make the shortfall even bigger. The Congressional Budget Office, or CBO, which is the nonpartisan federal agency that analyzes tax legislation, says a tax cut of the magnitude being talked about would reduce the money flowing into government coffers by $1.4 trillion over the next decade. So unless Congress makes drastic cuts in spending, simple mathematics says the budget deficit will only grow. Or will it? Trump administration officials have lately been pushing back hard against the deficit doomsayers. Here was Budget Director Mick Mulvaney on CNN this weekend.

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MICK MULVANEY: The CBO refuses to give any value at all to the dynamic effects of lowering taxes and letting people keep more of their own money.

ZARROLI: Reducing taxes, he says, leads to growth, which means people make more money and they pay more in taxes. So cutting taxes may blow a hole in the federal budget for now, but the impact will be reversed, at least in part, over time by the fact that the economy will grow faster. Treasury Secretary Steve Mnuchin has even said tax cuts will pay for themselves. Economists don't exactly dismiss that argument out of hand. Douglas Holtz-Eakin was the director of the CBO during the George W. Bush administration.

DOUGLAS HOLTZ-EAKIN: If the tax bills produce better economic growth, you can expect that to be beneficial with respect to the budget.

ZARROLI: Holtz-Eakin says, yes, cutting taxes can make the economy grow faster. But he doesn't buy the argument that tax cuts can completely pay for themselves.

HOLTZ-EAKIN: We don't have any experience that says that. We don't have any reason to believe that's true. It overstates the case.

ZARROLI: Economists on the left go even further. They say the claim that tax cuts pay for themselves is just another version of an argument that Republicans have been making for decades. Jared Bernstein is with the Center on Budget and Policy Priorities.

JARED BERNSTEIN: And at this point, it's remarkable that we're even arguing about it. It's just pure sales job, smokescreen, fairy dust.

ZARROLI: Bernstein says there's no evidence tax cuts have ever paid for themselves. Cuts passed by Congress in the 1980s and the 2000s were followed by big increases in the deficit. He also says it's not always true that tax cuts lead to faster growth. In fact, he says, tax cuts can actually lead to higher interest rates and less investment in infrastructure. And in the long run, he says, that can be bad for the economy.

BERNSTEIN: If you have a tax plan that is not revenue neutral - and this one is not by a long shot - one that adds to the deficit, that can actually hurt growth in the long run.

ZARROLI: Bernstein says there really is a need for comprehensive tax reform right now. And a well-designed tax plan could be good for the economy. But the tax plans now making their way through Congress threaten to increase the budget deficit. And if that happens, it could lead to other problems down the road. Jim Zarroli, NPR News, New York.

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