Imagine that you’re in charge of a business — say, a high-end event space near Palm Beach, Fla.
Now imagine that you have an idea for an advertising campaign that you’re confident will bring in money. You pitch your proposal to the board of directors: Spend $100,000 on the ad campaign, and we’ll reap $250,000.
Let’s say that the chief executive then asks you for the bottom line on your proposal. Which is the honest response?
- The company will gain $250,000.
- The company will net $150,000, once you exclude the $100,000 spent on the advertising.
If you answered (2), you’re correct. If you answered (1), you may have a bright future awaiting you in the administration of Donald Trump.
The analogy above was offered to me by Jason Furman, senior fellow at the Peterson Institute for International Economics and former chairman of the Council of Economic Advisers under President Barack Obama. His goal was to explain the math at the heart of the Trump administration’s first budget, math that in the estimation of a number of outside observers falls prey to precisely the misrepresentation in that example.
Seth Hanlon, a former Obama economic adviser who now works with the Center for American Progress, walked through the specific numbers at play. It all begins with the tax-cut proposal offered by the administration this month. Those tax cuts, the administration argues, would spur 3 percent economic growth.
“Stipulating that that happens, they are in their budget claiming that growing the economy by that much will produce $2 trillion in additional revenue” over 10 years, Hanlon explained. “Stipulating the 3 percent growth, $2 trillion of additional revenue sort of follows from that.”
So, here’s that $2 trillion in additional revenue.
It’s worth noting that this runs contrary to what the administration claimed when it first proposed its tax-cut plan. At that point, Trump’s budget team said that the reductions would be revenue-neutral, arguing that the tax increases from economic growth would offset the revenue lost from taxation.
What the budget proposal does, Furman said, is include the expected gains from the tax cuts without accounting for the losses. In other words, if the tax plan is revenue-neutral, there would be $2 trillion in additional revenue from economic growth — but $2 trillion less in revenue from reduced tax rates. This proposal skips everything after the dash in that sentence. Going back to our analogy: It claims the $250,000 as a gain without taking out the $100,000 spent on ads.
Hanlon concurred. “At the same time,” he said, the administration is “not counting the static or the gross costs of their tax cuts. Their budget essentially ignores the tax cuts and pretends they don’t exist.”
Alan Cole, an economist at the Tax Foundation, agreed. “If you’re thinking about things from a conservative perspective,” Cole said, “they’ve got the good part of what the tax plan does, which is the growth, but they don’t have the bad part, which is the reduced Treasury receipts.”
He pointed out that Trump’s proposal wasn’t even consistent with the tax plan in broad strokes. “As I understand it, there’s a page in this budget which shows revenue coming in from the estate tax, which they’ve explicitly planned to repeal,” he said. If it’s repealed, obviously, the amount of revenue coming in from it will be zero.
All of this analysis is predicated on the idea that the tax plan itself would lead to the growth that Trump claims — the stipulation that Hanlon offered above. That stipulation is strongly contested.
Hanlon noted a recent survey of economists by the University of Chicago. Thirty-seven economists weighed in, saying that they didn’t think that Trump’s tax cuts, as loosely introduced, would be revenue-neutral, contrary to the claims of the administration. The two who held the opposing opinion? It turns out that they misread the question. And they were just referring to the idea of a revenue-neutral tax proposal, not the administration’s prediction of an additional $2 trillion in revenue from out of thin air.
An estimate from the Committee for a Responsible Federal Budget analyzed Trump’s tax proposal and figured that the net result would not be neutral, but instead would decrease revenue by $5.5 trillion over 10 years (including both the costs and proposed limits on deductions).
The gap between that and what the administration claims? $7.5 trillion.
All three of the experts we spoke with offered unflattering summaries of the proposal.
“On the one hand,” Hanlon said, “they’re saying it is not fully formed. On the other hand, they’re saying it will boost the economy by more than any mainstream economist would say is at the outer limit of what’s possible.”
According to Cole, “a tax plan that’s dynamically neutral wouldn’t be enough” to hit $2 trillion. “They have more tax revenue in this budget than the [Congressional Budget Office] has in its baseline,” he said. “They have a greater amount of taxes collected. And that is — quite something.”
Furman’s view: “This is not an accidental mistake. This is a mistake that happens to people that have a ludicrously optimistic view of the impact of tax cuts and also don’t bother to actually specify or work out any of the policy details.”
For someone used to running a business, this mistake should be obvious.