JCT’s Analysis Shows the Tax Plans “Pay for Themselves” in Higher GDP
December 13, 2017
Since the release of the Joint Committee on Taxation’s (JCT) dynamic scoring of the House and Senate tax plans there has been a great deal of commentary about how the plans “don’t pay for themselves.” Critics point to JCT’s estimate that the growth generated by the plans reduces the expected revenue loss from roughly $1.5 trillion over ten years to around $1 trillion as some sort of failure of the plan, even though JCT’s model showed that the tax plans increased the size of the economy.
Whether a tax plan “pays for itself” is not the right measure for any tax plan. The proper measure is whether it increases the size of the economy, especially relative to any revenue loss it may incur for the federal treasury. JCT’s analysis clearly shows that on this measure, both tax plans are a net winner, creating much more GDP than what the U.S. Treasury “loses” in revenue.
The table below illustrates how much additional GDP is generated by each of the tax bills according to JCT’s estimates. JCT estimates that the House plan would increase the level of GDP relative to baseline by 0.7 percent on average throughout the ten-year budget window, while the Senate plan would increase the average level of GDP by 0.8 percent. These figures don’t represent the rate of GDP growth, just the level or amount of GDP. Thus, because baseline GDP over the next ten years is $239 trillion, the JCT scores imply an increase in the cumulative amount of GDP over the budget window of $1.67 trillion for the House plan, and $1.91 trillion for the Senate plan.
|Source: Joint Committee on Taxation|
|Average Added Level of GDP Growth/Year (Percent)||Dynamic Revenue Loss Over Ten Years (Trillions)||Additional GDP Over Ten Years (Trillions)|
From a purely economic standpoint, it is easy to see that the plans do pay for themselves by generating more GDP than the amount of revenues lost to the treasury. Indeed, for every $1 lost to the treasury, the House plan generates $1.67 in additional GDP over the next decade, while the Senate plan would generate $1.91 in additional GDP.
As we’ve noted previously, it’s also quite likely that JCT’s results are underestimating the amount of economic growth possible under the House and Senate plans.
It’s understandable that many lawmakers may worry about the deficit impact of the tax plan. But while the plans may not generate enough new revenues to fully offset the loss to the treasury, the gains to GDP certainly make this trade-off worth the cost.