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 center 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 investors 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.
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"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 skeptics' 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."