Future growth key to Trump tax plan
Treasury secretary says economic gains will pay for steep rate cuts
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.