Americans love government programmes but hate taxes. Over the past 40 years, Republicans have catered to these opposed preferences with magical thinking. They cut taxes but not spending, raising deficits in the process — exactly what conservatives promise not to do. Donald Trump is no exception. He promises a cut in corporate tax from 35 per cent to 15 per cent, along with a one-off lower tax rate to induce US companies to repatriate more than $2tn in profits held overseas. The top individual tax rate would also be cut from nearly 40 per cent to 33 per cent.
What the president has presented is not a tax plan so much as rough principles around which the administration can negotiate with Congress. Even so it is striking that Mr Trump has offered no substantive loophole closures, let alone spending cuts, to help pay for his proposals. The result, according to the Tax Policy Center, will cost the government about $2.4tn over the next decade. This is politically unpalatable to Republicans, who have pledged to support only revenue neutral tax reforms.
The administration — channelling Ronald Reagan’s adviser Arthur Laffer — says tax cuts will create economic growth, offsetting the fall in revenue. While the cuts should provide a temporary demand stimulus, there has been little evidence in the past 20 years that tax cuts sustainably boost growth. Tax cuts in 2001 and 2003 during George W Bush’s administration did not jump start growth. Neither did Obama-era cuts. Yet in 1990, when President George HW Bush raised taxes, gross domestic product growth went up for five years. Bill Clinton’s presidency included tax rises and strong growth. History has not been kind to Mr Laffer’s ideas. There is no alchemy in which tax cuts pay for themselves.