It was one of the questions that annoyed so many Republican presidential candidates at their last debate in Colorado.
You plan to “cut taxes without increasing the deficit?” John Harwood, one of the CNBC debate moderators, asked New York billionaire Donald Trump, who quickly replied, “Right.”
The question struck at the heart of this presidential campaign as candidates from both parties are offering economic plans many economists believe will exacerbate the current grim forecasts that the federal government will add at least $7 trillion to the nation’s current publicly held debt of $13.2 trillion during the next decade.
From Trump to retired neurosurgeon Ben Carson to Florida Sen. Marco Rubio and former Florida Gov. Jeb Bush, most Republican presidential candidates are pledging to push through Congress deep tax cuts, contending lower taxes will jolt the economy and generate more than enough tax revenue to sweep away years of projected deficits.
And on the Democratic side, Vermont Sen. Bernie Sanders has promised to spend trillions of dollars in new government spending on health care and education, while former New York senator and Secretary of State Hillary Clinton has offered more modest plans to spend more on roads, bridges, education, and scientific research.
“It is not surprising politicians only want to talk about things that make people happy,” said Len Burman, the Robert C. Pozen director of the Urban-Brookings Tax Policy Center in Washington. “But it does make you wonder how they will make it work.”
Burman said the numbers don’t add up for either party.
“It’s quite striking that the [Republican] party that seems really interested in deficits when they can blame Democrats has completely lost interest in deficits from their own candidates,” Burman said.
“The Democrats have a similar problem in that Bernie Sanders has a laundry list of spending programs that he would like to enact and he has said he wants to raise taxes (on the wealthy),” Burman said. “But the amount of spending he would like to do would require more than just raising the top rates.”
The leading Republican candidates have all rolled out robust tax cut proposals.
Sen. Ted Cruz of Texas wants to replace the current seven individual income tax brackets with a 10-percent single rate for everyone. Trump and Bush would reduce the tax brackets to three while Rubio wants two brackets at 15 percent and 35 percent.
Virtually all GOP candidates would kill the alternative minimum tax and the estate tax. And they either want to scrap the 35 percent corporate income tax rate or slash it to 25 percent, as Rubio wants.
But when the Tax Foundation, a non-partisan research organization in Washington, examined the plans offered by Bush, Cruz, Rubio, and Trump, they concluded each would drain trillions of tax dollars from the federal treasury.
The Tax Foundation modeled the candidates’ plans under two assumptions — static estimates and dynamic estimates. Static estimates assume that every $1 in tax cuts costs the treasury $1 in tax revenue. Dynamic scoring suggests certain tax cuts will encourage people to invest more money, sparking economic growth and generating more tax revenue.
“The thing they all have common is under static assumptions they add to the deficit over the next decade,” said Kyle Pomerleau, director of federal projects at the Tax Foundation and one of the report’s authors. But under dynamic scoring, Kentucky Sen. Rand Paul’s plan would provide an additional $737 billion in new revenue for the government.
Ken Mayland, president of Clearview Economics, an economic forecasting firm in Cleveland, said reducing certain taxes can boost economic growth, adding,“People respond to incentives and disincentives and the most effective incentives are reflected by” lowering not only individual but corporate income tax rates.”
‘Play Santa Claus’
The love of cutting taxes is a relatively new development in the Republican Party, where Presidents Dwight Eisenhower, Richard Nixon and Gerald Ford worried more about deficits and never championed large tax cuts.
But by 1976, conservatives became intrigued with the argument offered by the late Jude Wanniski, who wrote, “The only thing wrong with the U.S. economy is the failure of the Republican Party to play Santa Claus.”
He complained by focusing on deficits rather than economic growth, Republicans embraced “the role of Scrooge” while Democrats played Santa Claus by offering more spending programs.
In 1981 and 2001, Presidents Ronald Reagan and George W. Bush each followed Wanniski’s ideas and pushed deep tax reductions through Congress. But because federal spending continued to increase, those tax cuts helped produce staggering annual federal deficits.
“At this point this is almost a joke,” said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning non-profit organization in Washington.
“We have done this experiment twice,” Baker said. “The results are very clear. There is a positive growth impact from changing incentives, but we’re really talking about fractions and that assumes no countervailing factors such as an increase in deficits.”
The Tax Foundation has not yet evaluated Kasich’s economic plan, which calls for lowering tax rates, scrapping some deductions, boosting defense spending and coming to grips with the rapidly growing entitlement programs of Medicare and Medicaid.
Kasich, Paul and New Jersey Gov. Chris Christie are about the only Republican candidates who acknowledge that deep reductions in federal spending — including popular federal pension and health programs — would be needed to produce balanced budgets.
But even though Kasich has insisted many of the Republican “plans would put us trillions of dollars in debt,” critics complain the Ohio governor’s economic plan too would add to the publicly held debt, which is money the government owes to investors who buy government securities.
On the Democratic side, Sanders and Clinton have suggested higher taxes on the wealthy can pay for much of their new spending, which they argue is largely aimed at reducing the yawning gap in annual income earned by the wealthy and middle class in the United States.
But those claims are widely in dispute. A fresh report by the Brookings Institution makes clear that even by raising the top marginal tax rate from the current 39.6 percent to 50 percent would “have a relatively small effect on the distribution of after-tax income.”
“That such a sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge,” according to the report’s authors who include Melissa S. Kearney, a professor of economics at the University of Maryland and Peter Orszag, who served as director of the White House Office of Management and Budget under President Barack Obama.