On July 26, Joshua Rauh, a senior fellow at the Hoover Institution, addressed the House Ways and Means Committee at the Reagan Library. His insights were enlightening, and I feel compelled to share some of the key takeaways.
Economic Growth: The Lifeblood of Opportunity
Rauh emphasized that a thriving economy is crucial for bolstering economic opportunities for every American. Alarmingly, the Congressional Budget Office (CBO) projected, in its January 2025 Economic Outlook, an average real GDP growth of a mere 1.8 percent over the next decade. To illustrate the gravity of this figure, had the economy experienced such sluggish growth over the past 50 years, the United States would be staring at a staggering 40 percent contraction in its economic size today.
There’s a clear correlation between economic health and income growth across various demographics. This relationship has been particularly evident in the last two decades. For instance, from 2008 to 2016, the economy grew at an annual rate of just 1.7 percent, resulting in median real wages climbing a meager 0.4 percent per year. In stark contrast, between 2016 and 2019, a 2.7 percent growth in real GDP corresponded with a more robust 1.1 percent annual increase in median wages.
Additionally:
The Need for Transparent Tax Reforms
Effective pro-growth tax reforms hinge on reliable, transparent assessments from the Joint Committee on Taxation (JCT) and the CBO. Unfortunately, current practices leave much to be desired. The JCT’s conventional model, steeped in outdated methodologies, relies on off-model calculations that lack adequate documentation. Key metrics—such as the influence of rate changes on tax avoidance—remain undisclosed, complicating the evaluation of their findings.
Rauh urged Congress to mandate that these scorekeepers improve transparency, modernize their antiquated models, and openly disclose their key assumptions. Moreover, conducting sensitivity analyses or providing forthright assessments of their confidence in specific estimates would foster trust in official scores and equip lawmakers with the information necessary to facilitate further pro-growth tax reforms.
Furthermore:
Potential Underestimations in Economic Projections
Rauh’s recent academic research indicates that the CBO and the JCT may be underestimating the economic impacts of their provisions. This discrepancy could significantly alter the CBO’s predicted GDP growth rate and its implications for the deficit. For instance, using the CBO’s own guidelines, an annual productivity growth increase of just 0.25 percentage points could elevate the GDP growth rate to an average of 2.1 percent over the next decade, compared to their current forecast of 1.8 percent. Such a growth differential could lead to an impressive $1 trillion reduction in the deficit over the ten-year budget span. If productivity growth were to increase by 0.5 percentage points, GDP growth could rise to 2.5 percent, resulting in an additional $2 trillion in deficit reduction. This would effectively counterbalance more than half of the CBO’s projected ten-year deficits from the bill, crucially covering the anticipated deficit impact in the latter years of the budget window. Not to mention, this analysis doesn’t even factor in any extra tariff revenue generated by the administration. (italics added)
And lastly:
Spending Restraint: The Key to Future Growth
Perhaps the most critical point Rauh made was concerning the imperative of spending restraint for future economic growth. The primary fiscal challenge facing the United States isn’t a lack of revenue, but rather an overabundance of spending. The CBO projects that federal revenues will reach 17.1% of GDP in 2025, hovering near the historical average of 17.3% from 1974 to 2024. In stark contrast, federal spending is set to soar to 23.3% of GDP—over two percentage points above historical norms—and is expected to climb further in the next decade.
To underscore Rauh’s final point, if the government could reduce federal spending by just 2 percentage points, the deficit would shrink from 6.2% of GDP to a more manageable 4.2%. Why does this matter? A 4.2% of GDP addition to federal debt would keep that debt stable as a percentage of GDP, assuming nominal GDP growth aligns at 4.2%. Achieving this would be a significant step toward genuinely reducing federal debt as a percentage of GDP. (Note: This mathematical assertion holds true when public debt equals GDP, a condition that approximately applies today. The situation becomes more complex when those figures diverge.)
For those intrigued by such economic intricacies, I highly recommend reading the full testimony, which is a concise yet profound exploration of these issues.
