Most of the major presidential candidates have released tax reform plans with enough specifics to run them through an economic model, and the Tax Foundation has done exactly that.
Tax policy can be evaluated by its impact on economic growth, impact on federal revenues, and distributional effects (who benefits the most?). Republicans tend to focus on economic growth, while Democrats tend to focus on distributional effects. Both parties also care about revenue impacts, though Democrats want more revenue and Republicans want less.
A fundamental belief of conservative tax reformers is that reducing certain taxes makes more capital available for investment, which drives increased economic growth. And because a larger economy means more jobs and higher incomes for both individuals and corporations, growth-oriented tax cuts have the potential to recover some portion of the lost revenue.
The Tax Foundation’s model attempts to estimate revenue impact and growth effects, and the results are interesting:
- Jeb Bush would cut taxes by $3.6 trillion over ten years, but an additional 10 percent increase in GDP would recover 56 percent of the revenue loss, or just over $2 trillion.
- Ted Cruz would cut taxes by almost the same amount, $3.6 trillion, but an additional 13.9 percent increase in GDP would recover a whopping 79 percent of the revenue loss, or $2.8 trillion.
- Marco Rubio would cut taxes by $6 trillion over ten years, but an additional 15 percent increase in GDP would recover 60 percent of the revenue loss, or $3.6 trillion.
- Ben Carson would cut taxes by $5.6 trillion over ten years, but an additional 16 percent increase in GDP would recover 56 percent of the revenue loss, or $3.1 trillion.
- Donald Trump would cut taxes by almost $12 trillion over ten years. His plan would stimulate an additional 11.5 percent increase in GDP, but because his tax cuts are not targeted at increasing investment, his plan would recover only 15 percent of the revenue loss, or $1.8 trillion.
All the Republican plans would increase federal deficits unless coupled with significant federal spending cuts, the size of which would require reform of federal entitlement plans like Medicare and Social Security.
Hillary Clinton and Bernie Sanders, on the other hand, raise taxes, and because their tax increases are targeted at investment, would slow economic growth:
- Hillary Clinton would attempt to increase taxes by $500 billion over ten years, but a 1 percent reduction in GDP means her plan would only raise taxes by $191 billion.
- Bernie Sanders would attempt to increase taxes by a breathtaking $13.5 trillion over ten years, but the ensuing 10 percent reduction in GDP means his plan would “only” raise taxes by $9.8 trillion.
Trump and Sanders are obviously outliers, and neither of their plans is realistic. Hillary Clinton proposes tweaks to the system that would have a slight negative impact, while the remaining Republican candidates are all shooting for dramatically higher economic growth.
Though the Ways & Means Committee also has a say in tax reform, these comparisons give us some insight into the candidates’ priorities, and increased economic growth is certainly the right priority.