Allow me to introduce you to George Callas, House Speaker Paul Ryan’s senior tax counsel. He’s 43, was once a moderate Dem who became disillusioned with the party during the Clinton years, enjoys reading Greek and Roman history, and he knows something about tax policy, how it’s made, and the effects policy has on the economy.
On April 20th, Mr. Callas was part of a panel discussion hosted by the Institute of International Finance. The event occurred just shy of a week before the administration’s announcement of its page-of-bullet-points tax “plan,” which called for deep tax cuts, particularly corporate income taxes, only slightly offset by some revenue increases. In its rollout, the administration repeated the Laffler-esque mantra that tax cuts would pay for themselves by charging up economic growth.
I’ll touch on why that last part is nonsense in a moment. Mr. Callas addressed the more immediate nonsense.
“A plan of business tax cuts that has no offsets, to use some very esoteric language, is not a thing,” he said. “It’s not a real thing . . . Not only can that not pass Congress, it cannot even begin to move through Congress Day One.”
Mr. Callas chided the belief in “magic unicorns,” which he described as “people saying, ‘why don’t we do this instead’ when ‘this’ is something that cannot be done.”
You can watch the event here, by the way. Mr. Callas’ remarks come a little after the 54-minute mark.
Thing is, magic unicorns like the bullet-point tax “plan” have, because of their simplicity, great persuasive power. Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, observed, “Who doesn’t love a tax cut, especially if no one has to pay for it? This is a free-lunch mentality.”
As the curmudgeon H.L. Menken noted a century ago, “there is always an easy solution to every human problem – neat, plausible, and wrong.”
I worked on the Hill in the 1990s, under a Republican-led Congress. There was a system in place called PAYGO, which required that any additional spending or tax cuts had to have offsets, meaning they had to be paid-for with spending cuts or some other revenue source. The idea was not to add to the federal debt. This system helped produce the last balanced federal budget, at the end of the Clinton years.
Then, in 2002, PAYGO was dropped. Later, then-Vice-President Dick Cheney told then-Treasury Secretary Paul O’Neill that “deficits don’t matter.”
We’ll see. The conservative Tax Foundation estimates the “plan,” as presented, will reduce revenues and add between $4 trillion and $6 trillion to the debt over 10 years. That could matter a great deal.
This is probably a non-starter for another reason: there are enough people in Congress who know better than to believe that tax cuts alone will stimulate economic growth. It didn’t happen when taxes were cut (mainly at the upper end; ordinary people saw increases) in the Reagan years, for example. Yes, there was a growth spurt coming out of the recession, but that was fueled by other events. Fed Chair Paul Volker clamped down on interest rates; the price of oil dropped steeply; and deficit spending grew rapidly (giving Cheney the foundation for his remark).
Bruce Bartlett, who worked for Reagan and, later, the elder Bush, and who had a major hand in crafting the Kemp-Roth tax bill that became the first round of cuts in the 1980s, reviewed studies evaluating the impact of the 1986 tax package and concluded, “[I]t is hard to find ways in which it changed anything real in terms of economic growth, employment, or productivity.”
Over eight years, the Reagan administration presided over an average annual 3.5 percent growth in GDP, a smidgeon above Jimmy Carter and slightly less than Bill Clinton. Reagan trailed both Carter and Clinton in terms of average annual job creation.
Both Bushes cut taxes. Elder Bush’s four years were marked by an average annual GDP growth of 2.3 percent. Younger saw 2.1 percent.
In 2012, the Congressional Research Service prepared a study that looked back to 1945 and found that changes in the top tax rates did not correlate to growth, but they did correlate with increasing concentration of wealth at the top: https://fas.org/sgp/crs/misc/R42729.pdf.
At the state level, look at the basket case of the Kansas economy, where taxes were slashed and the expected growth never materialized.
Douglas Holtz-Eakin, director of the Office of Management and Budget under the Younger Bush, addressed this topic in the Washington Post the other day. He called promises of economic growth by cutting taxes “detached from empirical realty.”
As I have said in previous commentaries, tax cuts do some things very well. They get politicians elected. They redistribute wealth upward. They create deficits. What they cannot do boost the economy to unrealistic levels of growth.
You don’t like taxes and want them cut? Let’s have that debate. You want to cut taxes to shrink government—meaning, cut social spending; no one’s seriously going to lay a hand on the military budget—make that case. But if you really believe tax cuts will pay for themselves with economic growth, I have a magic unicorn for sale.