Tax Policy Alone Won’t Get U.S. to Four Percent Growth
June 16, 2015
This week, former Florida Governor Jeb Bush formally announced his presidential bid in Miami. One number that caught a lot of attention was “four percent:” the goal for economic growth that he would hope to reach if he were elected president.
This is an ambitious number, much higher than what economists are expecting from the next decade; the latest CBO baseline puts the long-term rate of real GDP growth at around 2.2 percent. So we would need to improve GDP growth by 1.8 percent every year – over and above what it would be otherwise – for us to meet Governor Bush’s goal.
In a country like the United States, that would mean making highly effective reforms in several areas of public policy simultaneously.
For example, one might think we could increase GDP through a well-structured federal tax reform. We can, and our Taxes and Growth model shows just that. But if we look at a recent real-life tax reform bill grounded in sound principles, the model showed a long-term GDP boost of 6.8 percent – that is to say, a cumulative 6.8 percent over about ten years, or about 0.66 percent per year for those ten years.
That’s a great number, one that would make a lot of people very happy. But the plan analyzed above is one of the most efficient tax reforms out there, and it still would get us only a third of the way from 2.2 percent to Governor Bush’s goal of 4 percent.
More growth is possible from tax policy, but likely not without substantial losses in progressivity or total revenues. The rest of the legwork in reaching four percent growth would likely have to come mostly from other places. (Perhaps some equally effective changes in spending and regulatory policy.)
In all likelihood, we will get four percent growth if and only if our 45th President (whether it is Jeb Bush or some other candidate) and our 115th Congress can cooperate to improve policy deftly and efficiently across the board. Whether such an outcome is possible depends a great deal on your faith in the presidential candidates of 2016 specifically, and the political system more generally.