Trump Tax Plan Reminiscent of Reagan’s Supply-side Economics
The Trump administration revealed the outline for a tax reform plan it intends to pursue over the next several months. The bulk of the plan relies on cutting the corporate tax rate from 35 percent down to just 15 percent, and includes many other changes meant to simplify the process for both businesses and individuals. As you can expect, the plan was met with cheers from one side, and derision from the other.
Bloomberg breaks down some of what we know about the plan, and what we don’t:
The “phenomenal” tax plan that President Donald Trump promised 11 weeks ago appeared at a White House briefing Wednesday: It was a one-page list of bullet-points that amounted to fewer than 250 words.
The document was largely devoid of detail, including on whether the proposed cuts for businesses and individuals would increase the federal deficit. The answer to that question may determine whether Trump’s recommended 15 percent corporate tax rate — a huge cut from the current 35 percent — would be permanent or temporary.
The points that the tax outline did include — calls for slashing business taxes, eliminating the alternative minimum tax and the estate tax, cutting individual income-tax rates and repealing an investment-income tax for high earners — amount to a conservative wish-list from the past several years. Separately, any one of them could provoke a titanic fight.
But the most immediate controversy is likely to focus on cost. The Committee for a Responsible Federal Budget released a rough analysis saying the plan could cost $3 trillion to $7 trillion over the next decade — potentially “harming economic growth instead of boosting it.”
The non-partisan research group determined that Trump’s corporate tax cut would cost $2.2 trillion, while his other cuts for other businesses would amount to $1.5 trillion. Doubling the standard deduction, which would help lower- and middle-class taxpayers, would cost roughly $1.5 trillion, the CRFB said, while repealing the estate tax, which would benefit wealthy families, would cost $200 billion.
The argument from the administration boils down to the age-old debate over supply-side economics versus Keynesian theory economics. With this tax plan, the Trump admin is claiming that spurred economic growth resulting from lowered taxes will make up for the loss in government revenue. This approach is very different from the prior administration which relied heavily on the theory that increased government spending is the engine for driving economic growth.
The biggest issue right now is that Trump’s tax plan is devoid of details leaving it impossible to score in terms of the deficit and how it would help the average taxpayer:
Other tax experts who would normally jump to analyze the plan were foiled by the scant specifics. “Sorry, friends. We cannot model this. Definitely not enough detail,” Kyle Pomerleau, director of federal projects for the Tax Foundation, said in a Twitter message. Len Burman, a fellow at the Urban Institute, was more pointed: “First draft of Reagan tax reform: three-volume 500+ page treatise. First draft of Trump: bullet points.”
Asked how Trump’s plan would affect a family of four making $60,000 a year, Cohn said: “It’s going to be a tax cut.” Pressed for specifics, he said: “We will let you know the specific details at the appropriate moment.”
White House budget director Mick Mulvaney says the details were intentionally sparse, according to CNBC:
“There’s no way to score what we put out yesterday. And we did it on purpose. Not to try and hide the numbers but to say, look, this is the first discussion,” the Office of Management and Budget director told CNBC’s “Squawk Box.”
Mulvaney said the White House “learned a lesson” from the failed first effort to replace the Affordable Care Act, which was spearheaded by House Speaker Paul Ryan. The Trump administration wanted to get involved in the discussion on tax reform “much earlier,” he said.
Without the specific details, it’s more difficult to pin down the weak parts of the plan which leaves everything open to negotiation. After the ObamaCare repeal debacle, the White House has taken a different tact with this plan, likely in an attempt to leave some room for the bargaining table with Democrats and/or skeptical Republicans.
Some Republicans are already expressing fears over the deficit:
President Trump’s sweeping proposal to cut corporate and business tax rates is raising GOP concerns about blowing up the deficit.
While most Republicans favor cutting taxes, worries that the proposal will spike the deficit are already leading to concerns it could cost Trump votes from his own party.
“Anything that completely spikes the ball with regard to deficits going forward I think will be problematic within the Congress,” said Rep. Mark Sanford (R-S.C.).
And the New York Times Editorial Board, not a friend of the admistration, offered some very harsh criticism hearkening back to Reagan’s tax cuts of the 1980s, according to The Hill:
In an editorial published late Wednesday, the publication’s editorial board called Trump’s proposal a “laughable stunt by a gang of plutocrats looking to enrich themselves at the expense of the country’s future.”
The plan slashes taxes for business and wealthy families, the editorial board wrote, in the “vague hope of propelling economic growth.”
“So as to not seem completely venal, they served up a few goodies for the average wage-earning family, among them fewer and lower tax brackets and a higher standard deduction,” the editorial said.
“The proposal was so empty of illustrative detail that few people could even begin to calculate its impact on their pocketbooks.”
The Times editorial specifically cited their disagreement with supply-side economic theory:
As to the rationale offered up by Mr. Mnuchin and Mr. Cohn, even many conservative economists believe that the argument that tax cuts will pay for themselves, by increasing investment and creating jobs, is the same supply-side fantasy that has repeatedly been proved wrong. This durable nonsense would instead add mightily to a federal debt that Americans will be paying off for generations to come.
So, here we are at this juncture again with competing visions for how best to spur economic growth and expand the economy. I suspect that a tax reform plan will eventually pass, though it may or may not look similar to the outline proposed yesterday by the Trump administration.