In the Nation's Interest

The New Budget: Double Trouble?

by JOE MINARIK June 06, 2017

A controversial element of President Trump’s budget is an alleged double-count of projected “economic feedback” from its proposed tax cut. 

President Trump clearly believes that tax rate cuts accelerate economic growth so much that revenues grow to at least erase the first-round revenue cost. However, because of the rush to produce a budget and the incomplete and inexperienced administration team at Treasury and at OMB, the President has not yet fully articulated his tax plan.

Usually, a President presents such a fundamental change of policy precisely – component by component, line by line. But this year, with policy still hazy, the budget merely “assumes deficit neutral tax reform” in English, not in Arabic numerals. There is not one single tax proposal in the budget book. Presumably, implicit in the budget, the “deficit neutral tax reform” includes unstated tax cut provisions that would be bigger (in absolute value) than the unstated tax reform (increase) provisions, but they all add up to zero because another unstated line perfectly offsets the others on net through favorable “economic feedback.”

However, also in the budget, there is a separate line claiming additional “effect of economic feedback” – deficit reduction from this tax cut – equaling $2.062 trillion over 10 years. So the Administration cannot yet articulate its tax reform program (it merely “assumes” the plan, for which it “will work closely with the Congress”), but can tell us that the program, whatever it is, will produce precisely $24 billion of “economic feedback” in 2019, $63 billion in 2020, and so on for 10 years. Clearly, some parts of the Administration’s program are more fully articulated than others.

All of this culminates in a $16 billion surplus in 2027. Some critics say that this is a double-count of the economic feedback from the tax cut.

Is it a double-count? Well, maybe yes, maybe no. Perhaps the Administration is telling us with their numbers that they are giving us The Full Laffer – that the tax cut will not just pay for itself, but will actually make money for the Treasury. There is no way from the budget book to say that this interpretation is wrong. The Administration has said that they “stand by the numbers,” so perhaps they are using this fulsome interpretation of Lafferism.

Some might say that the budget promises a surplus in 10 years, so even if it is a little off, that still would be an improvement. Why not give it a chance? Well, look at the budget’s numbers. To reach balance in 2027, the budget claims $5.625 trillion in total net budget savings over the next 10 years. Of that total, the “economic feedback” from the tax cut, in addition to the economic feedback that pays for the tax cut itself (controversial on its own), is $2.062 trillion. Another $1.404 trillion comes from the “two-penny plan,” under which the Administration and the Congress must find 2 percent savings in appropriations relative to the prior year, every year, over and over. Thus, more than 61 percent of the budget’s assumed savings come from either Laffer-style “economic feedback” – over and above revenue neutrality – or spending cuts that have not yet been specified (this year’s “magic asterisk”).

After the “two-penny plan,” 2027 non-defense appropriations – which encompass our infrastructure investment, research, education, the administration of justice, food safety inspection, and a host of other public services – are projected at 1.4 percent of GDP, compared with 3.3 percent last year, and 3.7 percent in 2005, just before the financial crisis. Can 1.4 percent of GDP be adequate, given that many of those public services – think transportation – are the underpinnings of the economy, and probably need to grow in step with GDP (and the size of the population)?

The next-largest savings – Medicaid, Social Security disability, and “welfare” (including SNAP, formerly known as food stamps) – have alarmed the President’s own party in the Congress, whose leaders have disavowed the President’s proposal, and said quite openly that they will develop and enact their own. Can these substantial cuts be realized?

Once the electorate comes to expect an enormous tax cut, it will be very hard to resist. This nation has a track record of enacting supply-side tax cuts, assuming and spending the benefits, and then finding itself in budget trouble.

This budget is another high-stakes bet – a “riverboat gamble,” in the enduring words of the late Republican Senator Howard Baker of Tennessee, looking at a similar budget in 1981. Senator Baker took that bet, and voted for the budget. Over the next 12 years the debt-to-GDP ratio doubled, from 25 percent to 50 percent.

So suppose we pass big tax cuts again. What if they once again do not perform to their advocates’ expectations? What if they do not “pay for themselves,” much less pile up an extra $2.062 trillion of revenue on top? What if the “two-penny plan” proves impossible to achieve? What if the cuts in benefits for the least-well-off Americans prove unacceptable? Worse still, what if all of these contingencies arise?

What would Howard Baker advise his successors today?