When I was in college, a new sports betting website called Cent Sports was a popular hit with me and my sports fanatic friends. The concept was simple. Every new user was given ten cents to make sports bets with and the user would try to turn those ten cents into real money. The strategy was to make risky bets at the start to build up your balance quickly since they would just give you another ten cents if you bottomed out. If you had over a dollar in your account, you were doing really well. If you had over ten dollars, you might as well be Bill Gates! What made the site so fun is that it was an easy and risk-free way to put your sports knowledge to the test. If you lost, it hurt your pride but not your wallet.
Republican Congressmen and economists are playing a similar betting game – let’s call it One-Hundred-Trillion-Cent Sports. In December, without a single Democratic vote, the Republican Congress passed and President Trump signed the Tax Cuts and Jobs Act. In their budget rules, Republicans gave themselves $1.5 trillion in additional debt room to cut taxes on a static basis (meaning without factoring in economic impacts), under the assumption that the economic growth spurred by the tax bill would make up the difference in lost revenue. The idea is that even if the tax rate is lower, the federal government will collect more tax revenue because there will be more income and activities to tax in a stronger economy.
The Congressional Budget Office (CBO) recently threw cold water on that idea. CBO came out with its updated ten-year budget projections that included its first analysis of the Republican tax bill. CBO projected that the tax bill will add $1.9 trillion to the debt over the next decade, even after accounting for $550 billion in new revenue caused by increased economic growth.
Nonsense!, say economists Arthur Laffer and Stephen Moore in an op-ed titled “The CBO fails to understand economic growth lowers debt.” In the op-ed, they argue that CBO does a poor job of estimating the impact of the tax bill because they do not account for nuances like tax sheltering, evasion, and inversions in their models. More importantly, they believe that CBO does not account for the booming economic growth that the tax bill will produce. They contend that “CBO’s entire bogus growth and fiscal forecast is based on the belief that Trump’s policies won’t work. But they are indeed working. Every economic indicator — the jobs reports, the stock market, the small business confidence index, business investment — points straight north.”
Laffer and Moore’s modeling shows that an economy growing by 3 percent annually instead of 1.9 percent will grow federal revenues by more than $3 trillion, more than enough to pay for the tax cuts. Their belief that the growth induced by tax cuts will pay for the tax cuts is one shared and touted by many Republicans on Capitol Hill. Is it possible? Certainly. But it’s a huge gamble. One that Republican members and economists were not entirely confident in when they wrote the bill.
During the tax writing process, Senators Lankford, Flake, and Corker floated a trigger provision that would pare back the tax breaks years down the line if the tax bill did not generate the amount of revenue needed to pay for itself. These three Senators were hedging – saying that we think that tax cuts can pay for themselves but if we’re wrong then we still need to preserve the revenue baseline. We do have a $21 trillion debt after all.
A litany of Republican members, groups, and economists blasted the idea, including Stephen Moore who said on Twitter: “So-called “triggers” for future tax HIKES are destructive & a threat to economic growth. #TaxBill should reject. We need competitive rates & predictability.”
But if “Trumponomics” and growth-financed tax cuts are such a certainty, the trigger would never happen. Republican members and economists are confident in their claims when making speeches and writing op-eds but were not as confident when they made sure to exclude the trigger from the final bill. They refused to put their money where their mouth is.
Instead, the risk will be transferred to younger Americans who are on the hook for the added debt if the bet turns up a loser. While we should all be hopeful that economic growth booms and the tax cuts pay for themselves, it is an unhedged bet made with Republicans’ pride but millennials’ wallets. For young Americans, Republicans put our money where their mouth is.