Donald Trump won the presidential election last November based largely on his economic message. And a big part of that was his pledge to cut taxes and ignite economic growth — something the Trump team said repeatedly it can accomplish without ballooning the nation’s budget deficit.
Echoing Trump’s position Treasury nominee Steven Mnuchin told senators at his confirmation hearing Thursday, “I think we want to make sure that tax reform doesn’t increase the deficit.”
But there is a big potential problem. Economists who have actually crunched the numbers say that even under the most favorable conditions, his claims just don’t add up.
Indeed, right- and left-leaning economists are divided on the extent to which his tax plan will spur GDP growth. But they agree that his plan will not be deficit neutral — despite what Mnuchin said Thursday and Trump himself has previously claimed.
And, yes, that’s even after what wonks like to call ‘dynamic scoring,’ which tallies up any potential increase in tax receipts as a result of economic growth — a factor Republicans often say doesn’t get enough attention.
What Trump Wants
Trump’s tax plan is complicated. It changed several times during the course of last fall’s campaign, and, of course, the new Congress has yet to weigh in. But the Trump plan has been looked at by a number of outside groups of varying political orientations, and they all have concluded one thing: Even when you factor in the potential growth unleashed by cutting taxes, Trump’s plans will increase the deficit.
It’s worth noting that the Trump campaign complained in September that outside analysts didn’t factor in positive economic effects of its proposed energy, regulatory and trade policies. But it’s typical for experts to exclude vague and far-afield policy proposals in evaluating candidates’ tax plans. The same analysts also, for instance, ignored potential economic benefits of the Clinton campaign’s plan to spend heavily on subsidizing public college. Even the most sophisticated economic models can’t accommodate every aspect of policy.
What’s more, economists are also largely in agreement that Trump’s trade policies — such as imposing hefty tariffs on China and Mexico — will hurt, not help, U.S. economic growth. In fact, one right-leaning pro-trade think tank described the Trump team’s budget math as simply “magical thinking.”
There’s one wonky issue to understand before looking at the various analyses — details of which are at the bottom of this page, for those who want more info. Republicans have been arguing for a long time that cutting taxes will spur growth; they have also complained for years that budget projections give these economic benefits short shrift. After all, faster growth tends to boost Americans’ incomes, which in turn boosts tax receipts, at least partially offsetting the lost revenue from any tax cut.
And lately, tax-cutters have largely gotten their way on this point. In 2015, Republicans in control of Congress ordered two key in-house government research agencies — the Congressional Budget Office and the Joint Committee on Taxation — to start factoring any growth potential from proposed tax cuts into their budget estimates, at least for major bills. That’s the “dynamic scoring” that the GOP has been seeking — although neither of the two agencies have yet taken up Trump’s policies.
Other analysts have done so, however, including the right-leaning Washington think tank, the Tax Foundation — which has dynamically scored tax plans for years — and the centrist Tax Policy Center, which adopted the practice this fall, just in time to evaluate the Clinton and Trump tax plans. Two other assessments of the plan come from Moody’s Analytics, a Wall Street research firm run by prominent economist Mark Zandi, and another Washington think tank, the Committee for a Responsible Federal Budget, which is hawkish on deficits. Of these four, only the CRFB analysis did not incorporate dynamic scoring in its assessment.
All four of the groups concluded Trump’s tax plan would fail to pay for itself. Projected deficits ranged from $2.6 trillion (in the most optimistic estimate from the Tax Foundation) to more than $10 trillion for Moody’s.
That is not to say all of the analysts agree on everything. The Tax Foundation finds Trump’s plan will still boost annual GDP growth to as much as 2.7% over the next decade — vs. the 1.9% growth the CBO has predicted as a baseline — despite a much larger budget deficit. That’s because the Tax Foundation’s analysts believe the U.S. can safely borrow to patch budget shortfalls without pushing up interest rates.
That position, however, is a minority one. Both the Tax Policy Center and Moody’s take the opposite tack, and see any deficit increase as boosting rates and therefore putting a drag on GDP growth — potentially defeating the stated purpose of rejuvenating the economy. (The two government researchers, the CBO and the JTC, haven’t scored Trump’s plan specifically. But they also tend to view deficits as ultimately raising interest rates.)
The CRFB, meanwhile, didn’t lay out a forecast for GDP, but it did say it believes the macro-economic impact of the plan “is likely to be small — and possibly negative — over a ten-year window.”
Of course, Trump could cancel out the cost of tax cuts in other ways. He could attack the shortfall by trimming government spending, for instance; he has already promised to force government departments like the Energy Department and the Food and Drug Administration to dramatically trim their budgets. Then again, he has also proposed big budget increases — like spending an extra $950 billion over 10 years on defense and veterans services — that would largely cancel out any savings.
That leaves the option of financing his proposed tax cuts with borrowed money, thus adding to the nation’s $14 trillion federal debt. That could be a sticking point. Many of Trump’s fellow Republicans — and in particular House speaker Paul Ryan and Rep. Mick Mulvaney, whom Trump recently chose to be the official in charge of his budget — have long styled themselves as deficit hawks.
More on the Scorecards
A few more details about how the analyses were conducted, and what they found:
- 10-year effect on economic growth: +1.5% a year
- 10-year debt impact: None, “deficit neutral”
- Assumptions baked in: Dynamic scoring, based on Tax Foundation’s lowest estimate, with difference made up by trade, regulatory and immigration gains.
- 10-year effect on economic growth: +0.7% to 0.8% a year
- 10-year debt impact: +$2.6 trillion to $3.9 trillion
- Assumptions baked in: Dynamic scoring but ignores effects of other proposed policies like Trump’s immigration and trade plans. Assumes interest rates will remain low despite mounting deficits.
- 10-year effect on economic growth: -0.5% a year
- 10-year debt impact: +$7 trillion
- Assumptions baked in: Dynamic scoring but ignores effects of other proposed policies like Trump’s immigration and trade plans. Assumes interest rates will rise in response to mounting deficits.
- 10-year effect on economic growth: -1.7% a year
- 10-year debt impact: +$13.7 trillion
- Assumptions baked in: Dynamic scoring and factors in the effects of Trump immigration and trade plans. Assumes interest rates will rise in response to mounting deficits.
- 10-year effect on economic growth: N/A
- 10-year debt impact: +$5.3 trillion
- Assumptions baked in: Not dynamically scored