The Trump administration plans to rely on controversial assumptions about economic growth to offset steep cuts to business and individual tax rates, a chief architect of the plan said Thursday.
Treasury Secretary Steven Mnuchin said the economic growth that would result from the proposed tax cuts would be so extreme – close to $2 trillion over 10 years – that it would come close to recouping all of the lost revenue from the dramatic rate reductions. Some other new revenue would come from eliminating certain tax breaks, although he would not specify which ones.
“The plan will pay for itself with growth,” Mnuchin said at an event hosted by the Institute of International Finance.
Assuming economic growth based on changes to the tax code is known as “dynamic scoring,” and many conservatives embrace its use when arguing for lower rates. But estimating the future economic impact of tax cuts is very difficult to do, as it requires policy makers to rely on economic forecasts that are often imprecise.
And even if the White House has rosy estimates about the economic impact of the tax cuts, the administration could run into trouble as any plan moves through Congress. That’s because Congress relies on tax analyses performed by the Congressional Budget Office and the Joint Committee on Taxation, which tend to have a more restrained view on the macroeconomic effect of tax cuts.
“We have some evidence about how big these effects can be,” said Donald Marron, a former CBO official who is director of economic policy initiatives at the Urban Institute. “They are not zero, but they are modest.”
President Trump believes the tax code is too complicated and tax rates are too high, and he has made overhauling the tax code one of his top priorities. But simply cutting taxes — lowering the rates that businesses pay and that individuals pay — is difficult for lawmakers because of congressional budget rules. Most Democrats will not support a tax plan that simply cuts tax rates, and Republicans have a narrow 52-to- 48 advantage in the Senate.
To pass a tax plan along party lines, they have to ensure that it won’t grow the deficit beyond the first 10 years. That requires them to find new revenue to offset what they will lose by cutting rates.
Speaking shortly after Mnuchin, White House National Economic Council Director Gary Cohn suggested that the White House still hadn't decided on all the specific elements of its tax plan.
"We've got a lot of things on the table," Cohn said. "We're working with all of the different levers."
He said, among other things, that there would be some sort of "reciprocity" tax that aims to raise taxes on imports from countries that have tariffs against U.S. imports, citing the example of automobile sales. But he declined to give more specifics.
Cohn also left open the possibility that the White House would seek a temporary change to the tax code if it meant they could lower rates for a short-term period in order to get congressional support. He said the White House prefers a "permanent solution" but "we have to do what we need to do."
Trump has in the past proposed cutting the corporate tax rate from 35 percent to 15 percent and cutting individual income tax rates sharply as well.
Even if Trump’s tax proposal would bring in $2 trillion in new revenue over the first 10 years based on economic growth — something many liberal economists would contest — it offset the lost revenue that experts projected would occur from big rate cuts. The Tax Policy Center, working with the University of Pennsylvania, estimated that Trump’s proposed tax cuts would reduce revenue by $6.2 trillion over 10 years. The researchers said Trump's proposed plan would initially lead to more economic growth but the resulting growth in government debt — driven by falling revenue levels - would eventually hurt economic growth.
The conservative-leaning Tax Foundation had a rosier outlook, but also predicted the plan would increase the deficit despite the benefits of a stronger economy. The foundation projected the Trump tax plan would lead to a loss of revenue of $2.6 trillion to $3.9 trillion after accounting for increased economic growth.
At an IIF session earlier in the day, Douglas Holtz-Eakin, a conservative economist and a former director of the Congressional Budget Office, warned against assuming that tax cuts would pay for themselves. Interest on the national debt continues to mount, he said — and if those costs increase, they could cancel out the benefits of reducing taxes.
“I would start drinking earlier every day, yes, absolutely,” Holtz-Eakin said, if the administration proposed a plan that would increase federal borrowing and relied on optimistic assumptions about increased economic growth. That type of plan might not win support among Republican lawmakers, either, Holtz-Eakin said.
“In both the House and the Senate, there are large blocs of Republicans who are properly quite nervous about the outlook, who when they think about growth, understand that sailing straight into a sovereign debt crisis is not a pro-growth strategy.”
The White House’s tax plan must win support in the House and Senate before it can become law. House Republicans are planning to try and push their tax overhaul plan through soon. Senate Republicans have been discussing ways to overhaul the tax code but they have not unified behind a central strategy. The Trump administration wants the overhaul plan to pass Congress well before the end of the year, a timeline that many lawmakers believe will be difficult to meet.