James Capretta of the American Enterprise Institute warns that no one should expect the 2017 federal tax cut to “pay for itself.”
The Trump administration and outside supporters have begun making the case that the 2017 tax cut is paying for itself, or nearly so. Republicans should abandon this line of argument once and for all because it isn’t credible and distracts from a stronger case for the legislation.
Republicans should stick with emphasizing that the tax cut is good for the economy, which is true. The Joint Committee on Taxation (JCT) has confirmed that the plan will promote faster economic growth. At the time of enactment, JCT estimated the legislation would expand the economy by 0.8 percent (or about $200 billion per year) by the mid-2020s, by encouraging business expansion and growth in the labor force. Relative to the size of the overall U.S. economy, the changes are small, but they are in the right direction.
JCT further estimated that, because the law would promote faster growth, some of the revenue loss from the corporate and individual tax-rate reductions would be offset by revenue from accelerated economic activity. Specifically, JCT estimated faster economic growth would generate $400 billion in additional federal revenue over 10 years, thus lowering the federal tax loss from the legislation from $1.4 trillion to $1 trillion.
The tax law would have been better legislation — and promoted even more economic growth — if it had been fully offset with provisions broadening the tax base or with spending cuts. Among other things, the GOP could have limited the tax break for employer-provided health insurance, which is the largest tax expenditure in the federal budget. They chose not to do so to avoid the risk of creating more opposition to the bill.
