Fu­ture growth key to Trump tax plan

Trea­sury sec­re­tary says eco­nomic gains will pay for steep rate cuts

The Washington Post - - ECONOMY & BUSINESS - BY DAMIAN PALETTA AND MAX EHRENFREUND damian.paletta@wash­post.com, max.ehrenfreund@wash­post.com

The Trump ad­min­is­tra­tion plans to rely on con­tro­ver­sial as­sump­tions about eco­nomic growth to off­set steep cuts to busi­ness and in­di­vid­ual tax rates, a chief ar­chi­tect of the plan said Thurs­day.

Trea­sury Sec­re­tary Steven Mnuchin said the eco­nomic growth that would re­sult from the pro­posed tax cuts would be so ex­treme that it would bring in close to $2 tril­lion in ad­di­tional tax rev­enue over 10 years, com­ing close to re­coup­ing all the lost rev­enue from the dra­matic rate re­duc­tions. Some other new money would come from elim­i­nat­ing cer­tain tax breaks, al­though Mnuchin would not spec­ify which ones.

“The plan will pay for it­self with growth,” he said at an event hosted by the In­sti­tute of In­ter­na­tional Fi­nance.

As­sum­ing eco­nomic growth based on changes to the tax code is known as “dy­namic scor­ing,” and many con­ser­va­tives em­brace its use when ar­gu­ing for lower tax rates. But es­ti­mat­ing the fu­ture eco­nomic im­pact of tax cuts is a dif­fi­cult task, since it re­quires pol­i­cy­mak­ers to rely on eco­nomic fore­casts that are of­ten im­pre­cise.

Even if the White House has rosy es­ti­mates about the eco­nomic im­pact of its tax cuts, they could run into trou­ble as any plan moves through Congress. That’s be­cause Congress re­lies on tax analy­ses per­formed by the Con­gres­sional Bud­get Of­fice and the Joint Com­mit­tee on Tax­a­tion, which tend to have a more re­strained view of the macroe­co­nomic im­pact of tax cuts.

“We have some ev­i­dence about how big th­ese ef­fects can be,” said Don­ald Marron, a former CBO of­fi­cial who is di­rec­tor of eco­nomic pol­icy ini­tia­tives at the Ur­ban In­sti­tute. “They are not zero, but they are mod­est.”

Pres­i­dent Trump says that the tax code is too com­pli­cated and that tax rates are too high, and he has made over­haul­ing the tax code a top pri­or­ity. But sim­ply cut­ting taxes — low­er­ing the rates busi­nesses and in­di­vid­u­als pay — is dif­fi­cult for law­mak­ers be­cause of con­gres­sional bud­get rules. Most Democrats won’t sup­port a tax plan that sim­ply cuts tax rates, and Repub­li­cans have a nar­row 52-48 ad­van­tage in the Se­nate.

To pass a tax plan along party lines with­out run­ning afoul of the Se­nate’s rules, Repub­li­cans must en­sure that the leg­is­la­tion won’t in­crease the deficit be­yond the first 10 years. That re­quires them to find new rev­enue to off­set what they will lose by cut­ting rates.

Trump has in the past pro­posed cut­ting the cor­po­rate tax rate from 35 per­cent to 15 per­cent and cut­ting in­di­vid­ual in­come tax rates sharply as well.

Even if the pres­i­dent’s tax pro­posal would bring in $2 tril­lion in new rev­enue over the first 10 years based on eco­nomic growth — some­thing many lib­eral econ­o­mists would con­test — that money off­sets the lost rev­enue that ex­perts pro­jected would oc­cur from big rate cuts. The Tax Pol­icy Cen­ter, work­ing with the Univer­sity of Penn­syl­va­nia, es­ti­mated that Trump’s pro­posed tax cuts would re­duce rev­enue by $6.2 tril­lion over 10 years. The re­searchers said Trump’s pro­posed plan would ini­tially lead to more eco­nomic growth but that the re­sult­ing growth in gov­ern­ment debt — driven by fall­ing rev­enue lev­els — would even­tu­ally hurt eco­nomic growth.

The con­ser­va­tive-lean­ing Tax Foun­da­tion had a rosier out­look, but it also pre­dicted the plan would in­crease the deficit de­spite the ben­e­fits of a stronger econ­omy. The foun­da­tion pro­jected the Trump tax plan would lead to a loss of rev­enue be­tween $2.6 tril­lion and $3.9 tril­lion af­ter ac­count­ing for in­creased eco­nomic growth.

At an IIF ses­sion ear­lier in the day, Dou­glas Holtz-Eakin, a con­ser­va­tive econ­o­mist and a former di­rec­tor of the Con­gres­sional Bud­get Of­fice, warned against as­sum­ing that tax cuts would pay for them­selves. In­ter­est on the na­tional debt con­tin­ues to mount, he said — and if those costs in­crease, they could can­cel out the ben­e­fits of re­duc­ing taxes.

“I would start drink­ing ear­lier ev­ery day, yes, ab­so­lutely,” if the ad­min­is­tra­tion pro­posed a plan that would in­crease fed­eral bor­row­ing and re­lied on op­ti­mistic as­sump­tions about in­creased eco­nomic growth, Holtz-Eakin said. That type of plan might not win sup­port among Repub­li­can law­mak­ers, ei­ther, he said.

“In both the House and the Se­nate, there are large blocs of Repub­li­cans who are prop­erly quite ner­vous about the out­look, who when they think about growth, un­der­stand that sail­ing straight into a sov­er­eign debt cri­sis is not a progrowth strat­egy,” Holtz-Eakin said.

The White House’s tax plan must win sup­port in the House and Se­nate be­fore it can be­come law. House Repub­li­cans are plan­ning to try to push their tax over­haul plan through soon. Se­nate Repub­li­cans have been dis­cussing ways to over­haul the tax code, but they have not uni­fied be­hind a cen­tral strat­egy. The Trump ad­min­is­tra­tion wants the over­haul plan to pass Congress well be­fore the end of the year, a time­line that many law­mak­ers be­lieve will be dif­fi­cult to meet.

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