It sounds so simple: Streamline the tax code, simplify the rules and watch the U.S. economy blossom.
That’s the message coming from just about every presidential candidate, at least. Virtually all of them contend that the U.S. tax code is broken, with too many complexities, loopholes that favor the wealthy and the highest corporate tax rate in the developed world. Republican Jeb Bush says tax reform will help boost GDP growth from middling levels of 2.5% or so to a robust 4%. His competitor Donald Trump says slashing the corporate rate from 35% to 15% will swell profits, create jobs and actually create new government revenue. Hillary Clinton wants to raise taxes on some capital gains, to make the tax code fairer and help boost middle-class incomes.
All those ideas may have merit, but politicians greatly overstate the possible economic benefits of tax reform. “Tax reform is an important tool to boost economic growth,” says Doug Elmendorf, former head of the Congressional Budget Office, in the video above. “But we have to be realistic about the quantitative effect of tax reform.” (Yahoo Finance is teaming with the Brookings Institution, where Elmendorf is now a visiting fellow, to present a series of explanatory videos on important economic topics.)
Elemendorf cites a 2014 tax plan developed by Dave Camp, the now-retired Republican Congressman from Michigan, who was chairman of the House Ways and Means Committee at the time. Camp’s plan was unusual (for official Washington) in that it accounted for the cost of tax cuts instead of leaving huge holes to be filled later. The plan’s math was considered reliable and was relatively free of gimmicks. Overall, the plan lowered tax rates for most people, eliminated a lot of loopholes, and added nothing to federal deficits. The nonpartistan Tax Policy Center called it “the most sweeping tax reform proposal floated in decades.”
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Yet the Camp plan would only have boosted economic growth by 1% over 10 years, according to Congress’s nonpartisan Joint Committee on Taxation. That’s 0.1% per year, more or less which is all but neglibible. “Is that the maximum we could get? Maybe not,” Elmendorf says. “But it gives you a sense of the scale… a tenth or two per year, over the coming decade.”
Candidates come up with much rosier scenarios for their various tax plans by using unrealistic assumptions or simply ignoring the downsides. Trump's plan, for instance, would cut taxes for many but add more than $1 trillion to the federal deficit every year, according to the Tax Foundation -- the most of any candidate. Democratic Sen. Bernie Sanders wants to impose a new tax on financial transactions, but other countries that have tried this have ended up pushing financial business out of the country to other places where trading is cheaper.
Pushing annual growth much above 3% will probably require many things besides changes to tax policy, such as sustained investment in infrastructure, improved education, better retraining for displaced workers and more effective government. Problem is, the boring details of numerous economic reform efforts don’t interest voters (or politicians) the way a single magic-bullet idea such as “fix the tax code” does. At least we can listen to the stump speeches, and dream it were that easy.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.
