The Hugest tax cut in US history: Should that be the goal?

The President on June 8th said, "We have also proposed a historic tax cut — biggest in the history of our country, by the way".  Although details about the plan await, an analysis by Jerry Tempalski of the US Treasury provides some indication of the potential size of the tax cut: at least -2.89% of GDP, the prior record from the Economic Recovery Tax Act of 1981.

A record US tax cut would reduce revenues over the next ten years by at least $7.3 trillion, at -2.89% of GDP.  However, the 1981 Tax Act That Act phased in a 23% reduction in individual tax rates, provided extremely accelerated depreciation of capital assets, and indexed individual tax rate brackets by inflation starting four years later.   By the fourth year after enactment, the reduction was -4.15% of GDP and probably still growing.  If the six out-years are at -4.15% of GDP, the President's total tax cut would be over $9.3 trillion over ten years. 

The President’s FY18 budget (Table S-2) claims there will be 10-year $2.1 trillion budget “effect of economic feedback”, some of which will be from tax “reform” as well as from other government initiatives.  Thus, the dynamic macroeconomic effects will only offset a small portion of the huge deficit increase from the tax cut yet to be proposed in sufficient detail to make an actual estimate of its total cost or its economic effects. 

Instead of trying to set a new record on the size of tax reductions, any tax change should focus on the future needs of the American citizens, and establish a tax system that effectively promotes economic growth, is simpler and also fairer. 

Tom Neubig