They would be very expensive for the economy.
President Trump’s White House followed a familiar pattern this last week, first generating breathless headlines on big promises about sweeping tax reform and then following through on Wednesday with a one-page tax plan too light on details to be considered formidable.
The skeletal outline — which offers fewer details than Trump’s proposals on the campaign trail — goes something like this:
- Cut corporate taxes from 35% to 15%. (Note, most companies don’t pay 35% anyway because of a variety of loopholes and deductions available to them. Treasury Secretary Steven Mnuchin has said the White House plans to close some loopholes, but he didn’t specify which ones.)
- Reduce the number of personal income tax brackets from seven to three. (Although the White House said the new tax rates would be 10%, 25%, and 35%, it did not specify how much income a household would have to earn to be included in each of those brackets. That’s a crucial missing detail.)
- Double the standard deduction, which reduces the taxes paid by average taxpayers who do not itemize their deductions.
- Lower the capital gains tax.
But the biggest missing detail of all was: How will the White House pay for the tax cut?
The plan will “pay for itself” Mnuchin said, through faster economic growth and “reduction of different deductions and loopholes.”
The memo is so scant on details, it’s been hard for policy wonks and economists to even make a first attempt at estimating the impact. “Sorry, friends. We cannot model this. Definitely not enough detail,” Kyle Pomerleau, Director of Federal Projects at the Tax Foundation tweeted.
That said, there have been a few very rough forecasts, the most notable one done by the Committee for a Responsible Federal Budget (CRFB), a nonpartisan group focused on reducing federal deficits and debt.
That group projects the plan would cost about $5.5 trillion over a decade, or roughly 2.3% of GDP over that period. By that measure, Trump’s tax cuts would not be the largest in history, as he has claimed, but rather the third-largest since 1940.
That said, they would still be very expensive for the economy. Once interest costs are included along with CRFB’s estimates, the federal debt would increase to 111% of gross domestic product by 2027 – the largest in history.
“No achievable amount of economic growth could finance it,” the CRFB wrote in a blog post.
Funding tax cuts of this size would require the U.S. economy to grow about 4.5% a year over the next decade. That’s 2.5 times the slow 1.8% rate currently projected by the Congressional Budget Office.
As the CRFB notes, the last time the economy sustained 4% growth was in the late 1960s and early 1970s. This period coincided with two major demographic shifts in the labor market: Baby boomers entered the labor force for the first time, and women started working outside the home in far greater numbers.
Now 4% growth is considered nearly impossible given the U.S. has an aging population and productivity growth has stalled.
“President Trump’s tax reform plan still lacks important details but as it stands, the plan appears it would add significantly to the debt,” the CRFP said. “Tax reform is an important part of any economic growth strategy. But expecting massive unprecedented economic gains from any tax reform is unrealistic; especially from one that is deficit-financed. “