82nd International Atlantic Economic Conference

October 13 - 16, 2016 | Washington, USA

Trump v. Cruz: The comparative economic effects of two tax proposals

Friday, October 14, 2016: 9:40 AM
Paul Bachman, Ph.D. , Economics, Beacon Hill Institute and Suffolk University, Boston, MA
Taxes impinge on individual and business decisions to work, save and invest. Using a dynamic computable general equilibrium model that we created for the National Center for Policy Analysis (the “NCPA-DCGE Model”), we simulate the effects on the U.S. economy of tax proposals by Donald Trump and Ted Cruz.  

Dynamic CGE models are the most appropriate tools for assessing the impacts of taxes and to understand how economic “agents” (taxpayers) respond to incentives and disincentives to work and save brought about by tax law changes. It is also important to understand how tax law changes affect federal, state and local government revenues. Lower tax rates usually reduce revenues but less so to the extent that they encourage work and saving. Higher tax rates usually increase revenues but less so to the extent that they discourage work and saving.

Both of the tax proposals considered here have the effect, on balance, of reducing tax rates on personal and business income. Both, therefore, increase economic efficiency and expand the economy, as shown by their predicted, positive effects on such indicators as GDP and private sector employment. Both also cause a loss in government revenues. Of the two proposals, one – the Cruz proposal – causes a smaller loss in government revenue than the other and results in a more pronounced increase in efficiency. One reason that the Cruz plan trumps the Trump plan on both counts (minimizing the loss in revenue and increasing efficiency) is that the Cruz plan goes further than the Trump plan toward turning the tax code into a tax on consumption.