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.