Washington
- A Republican plan for tax reform could be worse for the American economy than
previously thought, according to an estimate published Monday by the
nonpartisan Tax Policy
Centre.
In a fresh look at a tax plan being pitched by House Speaker
Paul Ryan, the centre estimated the proposal could reduce growth in the gross
domestic product by 0.5 percent after a decade and by 2.6 percent after 20
years.
Ryan's proposal calls for imposing what on paper would be a
new tax on imports and exempting any exports from taxes. Sceptics say that this
provision, known as a border adjustment, would make goods imported from around
the world more expensive for American consumers, eating into any tax cuts the
plan would grant middle-class families.
The plan's supporters say that fluctuations in global
currency markets would cancel out the new tax on imports. The Tax Policy Centre’s
new forecast is an update from a previous centre estimate that the GOP plan
would have little effect on the economy over the long term. The revised report,
however, also contains a bit of good news for the Republican effort on taxes,
suggesting the plan could give poor and middle-class households a more generous
tax cut.
In the previous version, the authors assumed that the border
adjustment would increase the prices of goods from overseas purchased by
ordinary families. If, as proponents argue, consumers did not pay the tax, a
typical household could expect their income to increase by at least 1 percent.
The Tax Policy Centre is an influential organization that
produces analyses cited by both Republicans and Democrats. The new data offer a
preview of how Congress's official nonpartisan referees might evaluate the plan
if Republicans formally present legislation.
All the same, the forecasts are uncertain, in part because
predicting how changes in taxation will affect the overall economy is an
immensely complicated task. Last year's report on the GOP plan was the centre’s
first attempt at doing so part of a shift in Washington away from narrowly
concentrating analyses on the federal government's finances and attempting to
forecast broader, so-called "dynamic" effects on the country as
whole.
Benjamin Page, an economist at the centre, said the previous
version contained an error resulting from incompatibility between his and his
colleagues' work and that of a separate group at the University of Pennsylvania.
The two teams of researchers had been collaborating to simulate those dynamic
effects over the long term.
"We're more confident in the current estimates,"
Page said. The revised analysis was published in a special issue of the
Columbia Journal of Tax Law.
After making corrections, Page and his colleagues only found
that the GOP plan would yield benefits overall increasing economic activity by
about 1 percent in the long run if they relied on optimistic assumptions about
how households and business would respond to reductions in taxes and how much
foreign investor would lend to the US government. Making especially
pessimistic assumptions, the report's authors predicted that the plan would
diminish the economy by as much as 9 percent by 2040.
The GOP plan would reduce taxes on businesses and households
would encourage spending and investment in the short term, stimulating the
economy. Over the long term, however, the government would borrow more money to
make up for the foregone revenue from taxes. That increased borrowing would
hamper economic activity.
Republicans such as Rep. Kevin Brady, R-Texas, who is the
chairman of the Ways and Means Committee and one of the chief advocates of the
bill, have said that their legislation will not increase the deficit. Most
analysts agree that to achieve that goal, Republicans would have to combine the
tax relief in their plan with reduced federal spending or settle for more
modest cuts.Either option would put a check on borrowing and lessen the
negative economic effects of reform.
"The growth estimate is inaccurate because it doesn't
reflect the actual content of our tax reform blueprint," said Emily Schillinger,
a spokeswoman for Brady, in a statement.
"Instead of including over $2 trillion worth of
deficits that are not part of our blueprint, we encourage the Tax Policy Centre
to study our actual proposal and release a new report about real growth estimates."
Republicans could also settle for more modest reductions in
taxes, but doing so would also limit the economic benefits they could expect in
the short term. Although the new report puts forward a worse forecast for the
economy overall, the revisions suggest that some groups would benefit more from
the GOP plan.
The older version of the report had projected that the plan
would give the middle class a relatively stingy tax cut, with the country's
wealthiest families enjoying the bulk of the savings. A typical household would
save about $260 in the first year after the reform, compared to over $200 000 a
year for a household in the wealthiest 1 percent of Americans.
According to the corrected forecast, it is possible that the
relief for the middle class could be double that initial projection but the
real amount would depend on the border adjustment, one of the most
controversial and uncertain elements of the GOP plan.
In their original analysis in the fall, Rosenberg and his
colleagues took the sceptics' position, calculating that consumers would have
to pay a new tax on imports.
If so, the GOP plan would increase the typical American
household's income by just 0.5 percent in the first year. On Monday, the
authors accounted for the chance that currency markets would absorb the new tax
on imports, in which case the typical household's income would rise by between
0.8 percent and 1.1 percent.
The Tax Policy Centre’s Joseph Rosenberg, another one of the
authors, said that the larger figures would likely prove more accurate in the
long term as prices and currency markets would eventually adjust to the new
system.
"In the short run, that's not guaranteed," he
said. "There are a lot of things that are up in the air."