The House tax plan seeks to balance competing interests and would make the tax system fairer and boost growth, but both liberal critics and the administration are making terribly exaggerated claims.
The Tax Policy Center, headed by a former Obama administration official, charges the bill will benefit mostly businesses and the wealthy, while Treasury Secretary Steven Mnuchin and White House chief economist Kevin Hassett claim the plan will pay for itself by boosting growth to 2.9% and household incomes by $4,000 to $9,000 a year.
Increasing the standard deduction to $24,000 per couple would free the overwhelming majority of lower and middle-class Americans from tedious record-keeping and tax-code complexities, by permitting the vast majority to file the one-page short from.
Eliminating deductions for state income and most property taxes would end the terribly unfair practice of forcing a $35,000 year waitress in Virginia or Wyoming to pay higher federal income taxes to subsidize the preferences of rich Californians and New Yorkers for very expansive local government bureaucracies and much richer public employee pensions than the waitress will ever enjoy.
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As for the administration, economists approach spending and tax cuts from two angles: the Keynesian demand jolt and supply-side incentives to invest — the “dynamic effects.”
A $150 billion annual tax cut allocated equally between corporate and personal tax cuts (including the estate-tax reductions and lower 25% rate for some pass-through corporate income) would increase the demand for goods and services through the usual Keynesian multiplier.
We should expect a one-time boost to GDP of $180 billion $225 billion and $30 billion to $40 billion in new tax revenues. However, those estimates do not consider dynamic gains from encouraging more investment and permanently higher growth.
Other industrialized countries have been shifting tax burdens from businesses to individuals by leaning heavily on personal income and value-added taxes while slicing corporate rates. European families may get inexpensive health care and higher education, but they pay for those with higher personal taxes than their American counterparts.
