May 25, 2017

Trump Favors Tax Cuts Over Deficit Reduction

Earlier this year President Trump said he would like to have a balanced budget “eventually” but not at the expense of higher spending on the military.

Robert L. Bixby, executive director of The Concord Coalition, called Trump’s comment “troubling because it indicates that he does not feel constrained by the need to make trade-offs in pursuit of his policy goals. It is an invitation to pit any worthy initiative against the goal of a balanced budget regardless of the cost.”

We can see this problem again in a recent Trump interview with The Economist in which he acknowledged that he also wants his large proposed tax cuts to take precedence over deficit reduction, at least in the near future.

The proposed cuts are estimated to cut trillions of dollars in federal revenue over the next decade, and Trump clearly plans to rely on some additional federal borrowing to help fill the resulting fiscal gap. That would be in addition to the $9.4 trillion in deficits that the Congressional Budget Office has already projected for the coming decade under current law.

Asked in The Economist interview whether he considered it OK if the tax plan increases the federal deficit, Trump replied: “It is OK, because it won’t increase it for long. You may have two years where you’ll . . . . you understand the expression “prime the pump”?”  

This indicates a belief that the tax cuts would give the U.S. economy a strong enough boost that the government would soon be able to count on enough additional revenue to offset the revenue that had been lost from the cuts.

Many economists and experts on the federal budget, however, consider it highly unlikely that the president’s deficit-financed tax cuts would eventually “pay for themselves” through economic growth.

This is partly because they are skeptical about the optimistic economic growth rates that administration officials are promising if Congress approves the administration’s fiscal plans -- many of which have yet to be spelled out.

Economic growth is indeed a crucial component of deficit reduction, and tax reform should be part of the mix. The goal, however, should be to enhance long-term growth potential and not to simply “prime the pump,” which would make more sense if the economy were in a recession.

In the current economic environment, large deficit-financed tax cuts aimed at a short-term boost could actually have a negative effect on long-term growth by enlarging the debt and draining savings from investments in productivity. The best recipe for the long term is to get our fiscal house in order, and that means making some hard choices on both spending and taxes.  

The White House has indicated it will release more of Trump’s budget proposals next week, and there will be a number of questions that policymakers, the media and the public should consider in analyzing those proposals.

Attempting to further justify deficit-financed tax cuts in The Economist interview, Trump reiterated his claim that the United States is the highest-taxed nation in the world. That is incorrect, as recently explained by the Committee for a Responsible Federal Budget.

The administration and Congress should temper their desire for deficit-financed tax cuts and new spending in defense and elsewhere with the recognition that the federal government is already on an irresponsible and unsustainable fiscal path. The debt is rising as a percentage of GDP, a trend that is projected to continue indefinitely.

As Bixby said earlier this year: “Rather than waving off the balanced budget goal as something that we’ll get to eventually, it would be better for the president to warn everyone that new initiatives must be paid for and that hard choices must be made to accomplish this.”