Monday, June 13, 2011

Pawlenty's tax cut proposal in perspective

The best available revenue estimate for Tim Pawlenty's crazy proposal to enact massive tax cuts, with only minimal specified financing, places the revenue cost at more than $1 trillion per year by 2014, the second year when it would be fully in place. The estimated annual cost would be more than $1.6 trillion by 2021.

Among other changes, Pawlenty would repeal the AMT and the estate tax, lower the top individual rate to 25% and the corporate rate to 15%, and eliminate the tax on interest, dividends, and capital gains. The main pay-for appears to be as follows: "Let’s grow the economy by 5%, instead of the anemic 2% currently envisioned."

This reminds me of the line from Shakespeare's Henry IV, Part I, where Glendower says "I can call spirits from the vasty deep," and Hotspur replies "Why, so can I, and so can any man / But will they come when you do call for them?"

If Pawlenty wants to dream, then I say why not call for 40% annual economic growth? Or perhaps 325%? If we're talking magical wish lists, why stop at so measly a number as 5%? Pawlenty evidently lacks the true courage of his claimed convictions.

On a more serious note, Economy Watch estimates that U.S. GDP in 2014 might be just over $17 trillion. While this obviously doesn't count the Pawlenty tax cut (which presumably would raise GDP if people were sufficiently myopic not to worry about future tax levels or default risks), it's worth noting, just for rough back-of-the-envelope purposes, that the revenue cost of the projected Pawlenty tax cut for 2014 is more than 6% of that amount. And the annual revenue-cost-to-GDP ratio very likely would stay at that level if we myopically ran forward the projections without taking into account the catastrophic budgetary effects that it would very swiftly have. So the infinite horizon estimate might also be in the neighborhood of 6% or more of GDP.

Just for comparison purposes, according to the most recent study by Alan Auerbach and William Gale, the most likely estimate of the long-term U.S. fiscal gap (under optimistic assumptions about healthcare growth) places it at between 6 and 7 percent of GDP.

So we are currently on a disastrous fiscal path, which everyone agrees cannot be permitted to continue, and at a very rough estimate Pawlenty, bottom-feeding for votes in the Republican nominating process, proposes roughly to double the size of the problem.

Personally I find his recklessness and irresponsibility thoroughly despicable, and all the more so because it is likely to prove politically contagious.

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