The key selling point of the Republican tax plan is growth: Cutting tax rates will create an economic boom, Republicans say, making any loss in revenue well worth the near-term fiscal cost. At its Lafferesque extreme, as put forth recently by Treasury Secretary Steven Mnuchin, tax cuts will have such a positive effect on the economy that in the end the government will collect more revenue than it otherwise would have, not less.
That sales pitch doesn’t have much backing in mainstream economics, and the historical connection between tax cuts and economic performance is murky at best, says Kate Davidson of The Wall Street Journal. While some tax cuts do seem to have fueled booms — the Kennedy tax cut of 1963-64 and the Reagan cuts of 1981 are two frequently cited examples — others appear to have had little effect. And sometimes the economy has boomed when taxes are high, like during the 1950s, or after taxes are raised, like in the mid-1990s.
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Going back to the 1870s, there’s only a “tenuous” connection between taxes and economic growth, historian Joel Slemrod of the University of Michigan says. Looking around the world, Slemrod found the same thing. “It’s really hard to just look at countries’ growth rates over time, relate that to what their tax rates and structures are, and say, ‘Ah, here’s the silver bullet,’” Slemrod said in the Journal.
As any economist can tell you, economic performance is driven by more complex forces than just changes to the tax code. A short list of key variables to consider includes productivity, labor force participation, private investment, government spending and deficits — all of which may interact with tax policy, but not in a simple or linear way.
That’s not to say that tax cuts can’t provide an economic boost. It’s just that any boost will likely be smaller and less durable than the Trump administration suggests. And one thing seems clear: Tax cuts are not self-funding: “Can tax cuts pay for themselves? The evidence overwhelmingly suggests that this is not true,” Slemrod says.
