Is “voodoo economics” back in style? The president’s new tax plan assumes that massive cuts will stimulate enough growth to pay for themselves.
The first President Bush coined the term “voodoo economics” to describe then-candidate Ronald Reagan’s proposed tax cuts. Once they became law, the national debt jumped 190 percent over his eight years in office. “(It’s) fool’s gold that you’ll cut taxes, everybody will work harder, more money will come and you’ll erase the fiscal impact,” Steve Bell, Republican staff director of the Senate Budget Committee from 1981-86, told The New York Times. “It never happens.”
The Committee for a Responsible Federal Budget estimates that Trump’s plan will reduce tax revenue by up to $7 trillion over a decade. To make his plan deficit-neutral, the economy’s growth rate would need to triple, to an eye-popping 4.5 percent per year. Since the economy has already largely recovered, what it will cause instead is inflation.
Putting it all on the tab risks destroying future generations’ financial prospects. Publicly held national debt already exceeds $14 trillion. Without any tax cuts or new spending, it is headed for $25 trillion in 10 years. That would produce the highest debt-to-GDP ratio in modern times — crippling our ability to fund a strong national defense, pay for basic services and care for an aging population.
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Huge budget deficits would also drive up interest rates and risk another serious economic downturn. That’s the concern expressed in a recent Wall Street Journal op-ed by Martin Feldstein, who chaired Reagan’s Council of Economic Advisers.
Lowering rates and reforming taxes are good objectives and way overdue. The House Tax Reform Blueprint proposed real reform, partially paying for it by taxing imports and repealing the deduction for business interest. These triggered so much opposition that the president doubled down on the cuts and eliminated the pay-fors.
Is there a better revenue source? Yes. A $40/metric ton fee on carbon emissions, rising gradually over 10 years, would generate $2 trillion. That revenue could pay for a sizable reduction in the corporate tax rate, protect low- and middle-income families from any higher energy costs, create jobs, make American companies more competitive, and provide funds to help coal communities and support coal miners’ pensions.
The bonus is that it would reduce greenhouse gas emissions enough for us to meet our Paris Climate Conference targets. Economists agree this free-market solution would be faster and more effective than more federal regulation. Republican heavyweights George Shultz, Thomas Stephenson and James Baker also make the case that a carbon fee is the smartest and most efficient way to tackle global warming.
Can this idea pass on Capitol Hill? My organization has been posing that question in more than 250 meetings with senators, House members and congressional aides of both parties. A clear majority are open to the idea, provided they hear support from back home. We also found that most of the Republicans we spoke with want tax reform to be paid for.
It’s “win-win” for taxes and for climate. For our children’s sake, let’s hope Congress agrees.
Walt Minnick is a partner in Partnership for Responsible Growth and is a former congressman for Idaho’s 1st District.