On Wednesday, President Trump will unveil a new set of principles for what he calls “massive” tax cuts for businesses and individuals — a plan bigger “than any tax cut ever.”
Those massive cuts will come with a massive problem for Trump’s economic team: how to pay for them. The White House doesn’t appear to have settled on a means of making up the trillions of dollars in lost federal revenue that economists predict will accompany Trump-size cuts. But administration officials are signaling they may be leaning away from hard choices to finance the cuts, and toward highly optimistic assumptions about economic growth.
Trump’s last tax reform plan, which he unveiled in September, involved slashing taxes on corporations, individuals, and pass-through businesses. That plan would have created a hole of $4.4 trillion to $5.9 trillion in the budget over the next 10 years, even by conservative estimates. On Monday, Trump signaled that cutting the corporate tax rate from 35 percent to 15 percent is his top priority, according to the Wall Street Journal — a move that by itself could cost the government $1.9 trillion.
Calculating the cost of tax cuts will be crucial to the success of tax reform. The easiest route for Republicans, politically, is to get a bill passed through budget reconciliation, which only requires a simple majority in the Senate. But the legislation would have to be revenue-neutral and not add to the deficit after 10 years.
To make the tax credits pay for themselves, Congress would need to offset the tax cuts by cutting spending in another area of government, or by eliminating some current tax breaks, such as the deduction for mortgage interest payments, or by raising taxes elsewhere in the economy, such as House Republicans have proposed with their border adjustment provision that would effectively tax imports.
But Trump hasn’t been enthusiastic about the border adjustment, and he doesn’t appear inclined to ax popular tax breaks, such as those for homeowners or real estate developers. His budget blueprint cuts domestic spending, but only to fund increases in military and homeland security spending.
Without any of those options at his disposal, his only hope to avoid adding to the deficit is a near doubling of economic growth.
Most economists doubt Trump’s tax cuts will pay for themselves
Last Thursday, Treasury Secretary Steven Mnuchin suggested that the tax overhaul will essentially pay for itself. The administration “fundamentally believes in dynamic scoring,” Mnuchin said at an event in Washington, DC.
Dynamic scoring is a type of economic model, popular among Republican lawmakers, that assumes tax cuts will be so good for the economy that they will indirectly generate more money for the government. Dynamic scoring models during the campaign, though, still showed Trump’s plan losing money.
In order for his campaign plan to pay for itself, the conservative-leaning Tax Foundation calculates, Trump’s cuts would need to add 1.6 percentage points of growth per year, every year, to the current forecast of 1.8 percent annual economic growth in the United States. Such growth “is not possible under any likely policy scenario,” says Alan Cole, a Tax Foundation economist.
Here’s where things could get weird. It would be possible for White House economists to design a model to come up with the administration’s desired results — to show massive growth effects from Trump’s tax cuts — but that could prove a political stretch.
“If you do dynamic scoring with a miraculous, pay-for-itself feature, that is very problematic,” says Donald Marron, director of economic policy initiatives at the Urban Institute and former director of the Congressional Budget Office.
It’s possible to use inflated estimates for reconciliation
In theory, lawmakers could whatever estimates they want to evaluate a tax plan, including aggressive White House models.
The procedural rules that the Senate would use to pass a tax bill with only 51 votes, avoiding the need for any Democratic support, are complex and usually very strict. But one way they aren’t strict is in calculating the cost estimates that are used to determine whether the bill adheres to those rules.
This is the general consensus from experts we consulted: If Congress wanted to swap in estimates from, say, the White House Office of Management and Budget for the ones typically provided by the CBO and that Joint Committee on Taxation, it probably could. Nobody can be 100 percent sure what will be deemed allowable — this is relatively uncharted territory.
“I don't think ... that there is anything that would prevent the Senate Budget Committee from using OMB projections instead of CBO/JCT projections,” Alan Frumin, a former Senate parliamentarian, said in an email. He added this catch: “Other than the institutional embarrassment of a house of Congress snubbing its own budgetary experts in favor of those from a different (and Constitutionally competing) branch of the government.”
This has come up before. There were conservative rumblings in 2015 that Republicans could use their own estimates to repeal Obamacare under the same Senate rules. Back in the 1990s, the Senate actually did it when they disagreed with the CBO’s assessment of the sale of oil reserves.
So the idea isn’t unfathomable. But it would be a big break from the norm.
It seems unlikely that Congress would go for this
Economists do believe that some dynamic scoring is legitimate to consider in cost estimates — that there will be some sort of broad economic benefit from cutting taxes. The thing is, they don’t believe it’s very much, and certainly not enough to offset trillions of dollars in tax cuts.
It’s unlikely that Congress would ever use super-rosy White House cost projections for major legislation like tax reform, Marron says. For most of their history, congressional budget committees always choose to use cost projections calculated by the nonpartisan Congressional Budget Office and the Congressional Joint Committee on Taxation.
When Republicans took over Congress in 2015, they began requiring economists at the budget office and taxation committee to take into account dynamic scoring on major legislation. So they will probably consider the macroeconomic benefits of tax cuts in upcoming efforts to overhaul the tax code. It’s very unlikely, though, that their estimates of the impact will be as generous as the White House’s.
House Ways and Means Committee Chair Kevin Brady, a Texas Republican and the lead tax writer for the House, recently reemphasized his view that any tax reform proposal should be revenue-neutral.
"I believe, both the most pro-growth approach we can take, and the fiscally responsible approach we can take, is to break even with the budget, counting on just solid, verifiable economic growth," he said at a Financial Services Roundtable event, according to the Hill newspaper.
It’s unclear how much dynamic scoring Brady would consider appropriate. But he has been clear on which scorekeepers he would accept. “Deficits matter,” he told Vox’s Jim Tankersley in a February interview. “And so we designed the tax reform in the House to be deficit-neutral, counting on economic growth. Not economic growth judged by us, but by the independent Joint Committee on Taxation.”
We’ll see if Trump agrees.