BEYOND THE NUMBERS
The Treasury Department’s new one-page “analysis” of the Senate Finance Committee-passed tax bill purports to analyze how much more economic growth and revenue that bill would generate. In reality, it does no such thing. It first assumes what the growth will be and then estimates the revenue that this growth would generate.
Normally, analysis of the macroeconomic effects — a “dynamic analysis” — of a tax bill starts with the bill’s actual provisions and estimates their effect on growth and revenue. The Treasury Department’s career staff can do such analysis, deploying models that they’ve previously used.
Instead, this report starts with the assumption in the President’s 2018 budget that the economy would grow 2.9 percent per year, on average, over the next decade if policymakers enacted all of the President’s policies — both tax and non-tax alike. It then compares the revenue that this 2.9 percent growth would generate with the revenue from “previous projections” of 2.2 percent growth under current laws and policies. The report provides no evidence that those policies would generate such growth. It merely presents Treasury career staff estimates that, if the growth rate rose by the assumed 0.7 percentage points, revenues would rise by $1.8 trillion over the next decade.
“Treasury expects,” the report says, that about half of that 0.7 percentage point difference would come from the bill’s corporate tax cut and the rest from other tax provisions and a mélange of non-tax policies that are not yet enacted, such as regulatory reform, infrastructure development, and cuts to safety net programs (which it calls “welfare reform”).
No careful analysis expects the pending tax legislation — whether the Senate Finance Committee-passed bill, the House- or Senate-passed bills, or a final bill that a House-Senate conference committee is now drafting — to boost economic growth enough to offset most or all of its cost. As we explain here, the Joint Committee on Taxation finds that the additional growth generated by the Senate Finance Committee bill would offset only $407 billion of its cost over ten years. That’s $1 trillion short of the bill’s official cost of $1.4 trillion, and even further below its likely cost if lawmakers undo provisions (such as the “sunset” of its individual tax cuts) designed to help the bill comply with budget rules, as leading Republicans say they favor.
So how, in the eyes of the Treasury Department, does the legislation go from losing $1 trillion over the next decade to generating an additional $1.8 trillion? Not by asking Treasury’s career staff to do a real dynamic analysis, but merely by assuming 2.9 percent annual economic growth instead of 2.2 percent.
Independent analysts, however, widely criticized the Administration’s 2.9 percent annual growth projection under the President’s policies as unrealistic — given projected trends in productivity and labor force growth and the relatively modest effects that most analyses (including past dynamic analyses by the Treasury’s career staff) find that economic policy changes can have on the economy over a decade. In fact, the gap between the Trump projection and the Congressional Budget Office’s (CBO) projection of 1.8 percent annual growth under existing laws and policies is the largest difference between an administration and CBO on record. Budget projections based on unrealistic growth projections will be similarly unrealistic.