Last week, Treasury Secretary Steven Mnuchin and Gary Cohn, chairman of President Trump’s Council of Economic Advisers, unveiled a one-page document that laid out the administration’s priorities for tax reform. While a document with such little detail could hardly be considered a “tax reform plan,” it is nonetheless instructive to look at how tax changes along the lines of what the administration is seeking could impact the nation’s already-large deficits.
The Committee for a Responsible Federal Budget (CRFB) estimated that tax changes consistent with the administration’s one-page proposal could decrease revenue by $3 trillion to $7 trillion over 10 years, with the “best rough estimate” being around $5.5 trillion. (Importantly, this figure excludes another $700 billion in interest costs that would be incurred if the tax cuts were entirely deficit-financed.)
Mnuchin and other members of the administration have argued that economic growth spurred by their tax changes might make up the revenue loss. However, there is no non-partisan economic model or historical evidence to suggest this could be true. The administration has also said that some revenue would be regained by closing loopholes but no specifics were provided other than to say that popular deductions for home mortgage interest and charitable giving would not be changed.
While tax reform should be an important part of any plan to put the nation’s fiscal house in order and to promote economic growth, to succeed in those goals such reform should either increase revenue or at least be revenue-neutral. The administration’s barebones outline appears to fail on that measure and stands in sharp contrast to revenue-neutral tax reform promised by Republican leaders such as House Ways and Means Chairman Kevin Brady (R-TX).
To understand the large impact a $5.5 trillion tax cut would have on the federal deficit, it’s worth comparing it to the 2001 and 2003 tax cuts passed during President George W. Bush’s first term.
The Bush tax cuts cost just over $1.5 trillion over ten years. Adjusting this number for changes in both inflation and the size of the economy since then, a comparable tax cut today would cost $2.8 trillion.
Equally important to the size of these tax cuts is the context under which they were enacted. When the first Bush tax cut was passed in 2001, the Congressional Budget Office (CBO) was projecting a $5.6 trillion surplus over the next ten years. Thus, after passage, the tax cuts would have still left a 10-year surplus of over $4 trillion.
President Trump faces a different fiscal context. The CBO projects that over the next ten years, deficits will total $9.4 trillion. A tax cut of the size Trump is proposing could swell that figure to $14.9 trillion. Finding offsets for such a large revenue loss would be exceedingly difficult and, to the extent they are found, would use tax increases or spending cuts that could otherwise be used to close the existing fiscal gap.
At a time when our long-term fiscal trajectory is already unsustainable, policymakers need to be particularly careful that new initiatives, whether they be spending increases or tax cuts, don’t make the problem worse. The administration should bear this in mind when it fills in the details of its tax reform outline.