Tax Law Doesn't Pay for Itself, Harvard Economists Find

03/08/18 06:14 AM EST
By Richard Rubin 

WASHINGTON -- The recent changes to the U.S. tax law will increase economic growth modestly but not fast enough to pay for themselves, according to a new estimate from a pair of economists from different sides of the political spectrum.

In other words, the additional government tax revenue generated by higher growth won't be enough to offset the drop in revenue due to tax cuts.

The net cost to the Treasury, after accounting for economic growth, would be $1.2 trillion over a decade, according to the paper by the Harvard University economists, conservative Robert Barro and Jason Furman, who was an adviser to President Barack Obama.

The tax law's provisions would boost U.S. gross domestic product by a total of about 0.4% by the end of a decade, the equivalent of adding 0.04 percentage point to the annual growth rate. The incremental gain would continue beyond that first 10-year period, according to the study.

The tax plan would produce even more growth if Congress extends expiring tax provisions, especially full, immediate deductions for capital investments such as business equipment, the authors conclude.

That full expensing is set to lapse after 2022 and other tax breaks are set to lapse after 2025.

Making the tax cuts permanent would roughly triple the amount of economic growth and add $500 billion to the fiscal cost, they estimate.

"We reached consensus on more stuff than I would have predicted," Mr. Barro said in an interview.

Still, despite their agreements, they wrote separate conclusions, with Mr. Furman warning of negative consequences from larger federal budget deficits and Mr. Barro calling the law "an important step in improving the efficiency of the U.S. tax system."

The economists are presenting their paper together at the Brookings Institution on Friday.

President Donald Trump signed the tax law in December, cutting tax rates on corporations, pass-through businesses and individuals. The plan also allows faster write-offs for capital investments, revamps the international tax rules for companies and removes or limits some tax breaks.

The tax law and its impacts are now at the center of the debate for the 2018 midterm elections. Trump administration officials and Republican lawmakers have made aggressive claims about the law's effect on the economy that are at odds with mainstream projections, including the official score from the congressional Joint Committee on Taxation. Treasury Secretary Steven Mnuchin says the plan will pay for itself.

"This is yet more evidence that the law would not come close to paying for itself," Mr. Furman said in an interview.

The paper projects that lower corporate taxes on investments would boost productivity, which should increase wages in the long run, Mr. Barro said.

The pairing matched Mr. Furman's public-finance background with Mr. Barro's expertise in macroeconomics, a combination that Mr. Furman said enhanced his appreciation for the power of write-offs for capital investments and research and development to drive economic growth.

"If you do the wrong things in tax reform, you can actually reduce [research and development] and that can be a problem," Mr. Furman said. "I understand tax reform now better than I did before."

Write to Richard Rubin at


(END) Dow Jones Newswires

March 08, 2018 06:14 ET (11:14 GMT)

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