Donald Trump’s tax plan is a massive giveaway to the rich, costing $6.2 trillion over its first decade (before interest payments) and directing almost half of that to the top 1 percent.
But he and his surrogates have insisted it’s worth it — and might even pay for itself — by igniting supercharged economic growth. “The Trump economic plan creates at least 25 million jobs, boosts growth up to 4 percent, and is revenue neutral,” the campaign boasts on its website.
One problem: According to new analysis from the nonpartisan Tax Policy Center, the Trump plan wouldn’t increase growth. It would reduce it. Substantially. And it would do so precisely because it’s anything but revenue neutral.
TPC, using the economic projections of the Wharton Budget Model (PWBM) from the University of Pennsylvania, projects that the plan will help the economy in the short run by putting more money in people's pockets to spend. But by 2025, the impact of the plan becomes negative as an explosion in US government debt raises interest rates for businesses and consumers. After its first decade, the plan would reduce GDP by 0.5 percent. By 2036, two decades after enactment, it would cut GDP by 4 percent.
Concurrently, the center released economic analysis of the effect of Hillary Clinton’s plans to raise taxes on the rich. They find the reverse effect: economic damage in the short run, but salutary effects from deficit reduction in the medium to long run. However, the analysis omits the fact that Clinton would use those tax hikes not to offset the deficit but to fund new spending. When that’s taken into account, the effect is likely a wash or modestly negative.
The Clinton analysis, then, is not all that informative about the consequences of her policies. The Trump analysis, however, is a fair reflection of what Trump would actually do, and the conclusions are pretty damning.
Conventional economics says Trump’s deficits will slow growth
The PWBM is what's known in economics as an "overlapping generations model," a common tool used to measure the long-run effects of policies that affect multiple generations of people. Like basically any economic model, it's imperfect. It relies on a lot of assumptions about how markets respond to changes in government policy, how much debt bondholders are willing to buy before demanding higher interest rates from the government, how investors react to lower tax rates on investment income, and the like.
But its conclusions, while subject to dispute, are nonetheless informative. TPC, in using the model, assumes that Trump is not able to finance the $6.2 trillion cost of the plan by cutting spending. That’s pretty fair; the cuts necessary to make that work would be genuinely massive to the point of utter implausibility. You could eliminate spending on foreign affairs, veterans, and income support for the poor and still not have enough to fund the tax cuts.
In the PWBM, as in most economic models, you can’t fund the government through borrowing indefinitely without interest rates rising. The logic is that after a while you’d run out of people willing to buy government debt at current interest rate levels, and to get buyers you’d need to jack up the rates. That means, in turn, that other people and firms that want people to lend them money have to jack up interest rates to get money that would otherwise go to the government. That means higher interest rates on mortgages, business loans, and the like. That slows down growth, as companies don’t borrow money to make investments they otherwise would have.
This effect creeps in slowly. Initially, both the PWBM and another model TPC uses show Trump’s tax cuts helping the economy by increasing people and companies’ after-tax incomes and thus boosting spending. PWBM, for instance, shows GDP jumping by 1 percent due to the plan in its first year. Pretty good, right? But then the effects of higher interest rates kick in. By 2024, GDP is right back to where it would've been pre-tax cut. By 2025, it's lower. By 2036, it's a full 4 percent, or $1.6 trillion, lower.
What about fiscal stimulus?
Over the past decade or so, deficit concerns have rightly taken a back seat to the task of economic recovery. The Federal Reserve has kept interest rates near or at zero, which many left-of-center politicians and economists have argued makes deficit-funded fiscal stimulus necessary. This isn't as costly as it is under normal circumstances, both due to low interest rates and because the stimulus boosts growth, which in turn raises tax collections and limits the actual cost of the stimulus.
The economy is still weak enough that many think we could still use a little fiscal stimulus. But there are signs that era is nearing its end. The Federal Reserve raised interest rates in December 2015 for the first time since the recession hit, and is talking about raising them again. The most recent Consumer Price Index data suggests that core inflation might be finally rising above 2 percent, the Fed's target. That suggests that now, or soon, it might be time for a return to conventional thinking on deficits, where they're viewed as, if not the worst thing in the world, at least a contributor to rising interest rates and a moderate drag on growth.
If you’re skeptical that things are really back to normal, then you should be skeptical of the projected harms of the Trump plan as well. TPC also ran a simulation using PWBM in which it assumed that capital markets were totally global and open. In that world, US deficit spending has basically no impact on interest rates, either for US debt or for business loans. It thus has little effect on economic growth either. In that world, GDP is left permanently higher by the Trump plan, even if it's never paid for.
Trump and his campaign can take solace in that scenario. But again, it’s not the middle-of-the-ground projection that TPC leads with. The projection in which they’re most confident is one that sees the Trump plan sharply reducing GDP over a 20-year time span. An even harsher set of assumptions shows the plan cutting GDP by nearly 13 percent by 2040.
TPC’s best guess, then, is that Trump’s plan, far from triggering a huge amount of economic growth as his campaign has promised, would hamper the economy, hobbling businesses with higher-than-necessary borrowing costs. The Trump plan, the analysis suggests, leaves America poorer, less equal, and much deeper in debt.