Last year, I proposed a handy rule of thumb for evaluating the economic proposals of politicians: The more growth they promise, the worse their plan probably is.
Why? Because the promise of bonkers growth usually means the politicians need that bonkers growth to paper over the ginormous deficits sure to follow – in the real world, under more realistic assumptions.
If you assume that the economy goes gangbusters and everyone gets a lot richer, then the tax base swells, spending on social-safety-net services falls, and hallelujah! That expensive thing you want no longer looks so expensive. Maybe it’s even free!
This rule of thumb was useful during the presidential campaign, when candidates promised that their infrastructure, health and tax proposals would “pay for themselves” through faster growth. It’s relevant again with the “Big Six’s” new tax “plan.”
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I put “plan” in scare-quotes here because it’s not really a plan. At best it’s an outline, offering barely more detail than the bullet points the Trump administration released in April. It doesn’t even specify the thresholds for the individual income-tax rates it proposes. It also doesn’t identify a single individual tax preference it would kill, despite claiming to simplify the code and close lots of “loopholes.” Even the state and local tax deduction, which administration officials have talked about eliminating, isn’t explicitly mentioned.
The plan’s designers may not know what their proposal is, exactly, but they know it will turbocharge growth.
President Trump told a group of Democrats and Republicans on Tuesday that this tax framework could lead the economy to grow more than 6 percent a year, as my Washington Post colleagues reported.
To give you a sense of how ridiculous that is, the Federal Reserve’s median forecast for long-term growth is 1.8 percent, thanks in part to demographic challenges facing the country. (What matters is the long-term number, as growth rates can bounce around a lot quarter to quarter and over the course of the business cycle.) The Congressional Budget Office, in scoring Trump’s budget this year, said it would add maybe a tenth of a percentage point to growth – bringing us to a whopping 1.9 percent.
Trump’s own economic advisers have said they think the sum total of all his tax and regulatory policies would get us to “only” 3 percent growth, a number that has been mocked by more or less the entire economics community.
National Economic Council Director Gary Cohn is one of the administration officials who has been using that 3 percent benchmark, which he repeated on CNBC on Thursday while declaring that perhaps we might get even “substantially over 3 percent.”
“We think we can pay for the entire tax cut through growth over the cycle,” he explained.
A Tax Policy Center estimate of the fuzzy April framework found that it would lower revenue between $3.5 trillion and $7.8 trillion over a decade, depending on which loopholes you assume get closed. Its numbers don’t change much after accounting for economic growth effects.
A separate estimate of the more recent framework, released by the Committee for a Responsible Federal Budget, put the cost at about $2.2 trillion.
Whatever the actual number is, we know it’s in the trillions. No realistic amount of growth is going to wipe that out.
In light of all these grand growth projections, I propose a corollary to my earlier rule.
Here it is: If you promise that your policy will “pay for itself” through faster economic growth, you must commit – in advance – to cutting the programs you love most if that growth doesn’t materialize.
For Republicans, that means writing language into their tax bill lopping trillions off defense spending. Hey, if they truly believe their plan won’t cost a dime, surely there’s no risk to our national security.
Otherwise, the yawning deficits that would inevitably result from the Trump plan may turn into an excuse to decimate programs Republicans are already eyeing, such as Medicaid and food stamps.
Kansas provides a cautionary tale here. The state passed sweeping tax cuts in 2012 on promises that they would unleash boundless economic growth. Instead, the state had below-average growth and huge budget shortfalls, which led to brutal cuts to services. School districts had to end the school year early.
Eventually, after coming to terms with the failure of their supply-side experiment, the state partially reversed its disastrous tax cuts.
Which may be where the country ends up in a few years, if this Trump tax framework passes. But as Kansas proves, a lot of damage – including, in the federal case, bigger debt – can be done in the meantime.
The Washington Post