President Donald J. Trump has promised a “massive” tax cut for Americans. He may be able to achieve it—but only temporarily, if the changes can’t meet the criteria needed by lawmakers to make permanent changes.
News that Trump’s plan isn’t likely to include a border-adjusted tax (BAT) suggests his proposed tax measures won’t meet the standard of revenue neutrality. That’s because the border tax that House Speaker Paul Ryan has proposed would generate more than $1 trillion in revenue over a decade, helping to pay for individual and corporate rate cuts.
“BAT is a big number, so it makes you wonder how they get to revenue neutrality without it,” said economist Douglas Holtz-Eakin, the president of the conservative advocacy group American Action Forum in Washington and a supporter of the border-adjusted tax. “On the campaign, they didn’t mention revenue neutrality, so maybe they don’t care.”
Treasury Secretary Steven Mnuchin on Saturday repeated the administration’s goal of getting “sustainable” economic growth of 3 percent or higher, and said Trump is counting on tax reforms to pay for themselves by boosting the economy and tax receipts along with it. Mnuchin, in recent months, has forecast growth as high as 4 percent.
“The difference of a little over 1 percent of GDP over a 10-year period of time can generate as much as $2 trillion of revenue in the United States,” Mnuchin said at the International Monetary Fund meeting in Washington. “There’s no question: we’re looking at reforms that will pay for themselves with growth.”
Before Saturday’s remarks, senior administration officials, including National Economic Council Direct Gary Cohn, as well as Mnuchin, signaled at an Institute of International Finance conference on Thursday that the administration is more concerned with growth and job creation than revenue neutrality in crafting its reforms.
White House Budget Director Mick Mulvaney echoed that point in a Bloomberg TV interview on Friday.
“Deficits are not driving the discussion,” Mulvaney said. “Deficits are certainly part of the discussion. But we’re not starting off saying, ‘How do we do something that’s deficit-neutral?’ We’re starting off saying, ‘How do we get economic growth?’”
Revenue neutrality is important to Congress, though. Republicans hold just 52 of the Senate’s 100 seats, and normal Senate rules impose a 60-vote threshold for legislation to avoid potential filibusters from opponents.
Senate Republicans could instead use a process known as budget reconciliation, which would allow a tax bill to be passed with a simple majority. But under that process, any legislation that added to the deficit would have to be set to expire after 10 years.
Ryan’s BAT proposal, which would replace the 35-percent corporate income tax with a 20 percent tax on US companies’ domestic sales and imports, would have provided some cushion in terms of revenue. But the concept hasn’t gained much support among Republicans. And retailers, carmakers and oil refiners that rely on imported goods have said the tax would raise prices on consumer goods. If Trump doesn’t support the measure, its chances of success will flag, as will the prospects of lasting tax cuts.
A corporate tax cut that wasn’t revenue neutral could expire after just two years under reconciliation rules, George Callas, Ryan’s chief tax counsel, said at the IIF conference.
The Associated Press reported on Friday that Trump said his plan will result in “massive” tax cuts for both individuals and businesses. The cuts will be “bigger, I believe, than any tax cut ever”, he said, according to the AP report.
Trump touted the coming announcement again on Saturday, telling his 28 million Twitter followers that “Big tax reform and tax reduction will be announced” on April 26.
Mnuchin’s comments on Saturday echoed his earlier prediction that most of the funding would come from the administration’s anticipated increase in economic growth, thanks to so-called dynamic budget scoring, and not from such revenue-raising changes to the tax code as the elimination of certain deductions.
“Some of the lowering in rates is going to be offset by less deductions and simpler taxes,” Mnuchin said. “But the majority of it will be made up” by dynamic scoring.
Under dynamic scoring, a tax plan’s revenue effects are considered in the context of the plan’s impact on economic growth and consumer well-being. The process can be contentious—economists disagree on the best ways to predict such effects—but Mnuchin has repeatedly emphasized its importance to the Trump plan.
The debate over dynamic scoring goes back to at least 1980, when George H.W. Bush accused Ronald Reagan of practicing “voodoo economics” in contending that his proposed tax cuts would pay for themselves as the pair vied for the Republican Party’s presidential nomination. While economists generally don’t believe that tax cuts are self-financing, there’s growing agreement that they can lead to faster growth and with it additional tax revenues. The question is how big that effect would be.
50 cents payback
Donald Marron, who served on former President George W. Bush’s Council of Economic Advisers, said the administration’s apparent estimate of the favorable feedback effects from lower taxes was “surprisingly large”, although he cautioned he hadn’t seen the details of the plan.
Holtz-Eakin, who also served in the Bush administration, was skeptical as well. He said he worries that the administration’s projections of the tax cuts’ economic benefits are far larger than it would be reasonable to assume.
“If you get 25 cents to 30 cents on the dollar, it would be counted as a quite successful tax reform plan,” Holtz-Eakin said. Mnuchin’s estimates suggest the administration is looking for a 50 cents-plus payback.
Besides revenue neutrality, the White House faces other roadblocks to a tax overhaul. The administration still has to get the tax-writing committees in the House and Senate on board with whatever it proposes. Additionally, legislation to repeal and replace the Affordable Care Act—which includes almost $1 trillion in potential tax cuts of its own—
remains an uncertain prospect.
The Senate Finance Committee was unaware of what the White House tax plan would entail and hasn’t seen a rough draft, a person familiar with the matter said on Friday. The committee has been having regular discussions with Treasury and White House officials on a tax overhaul, but was surprised by Trump’s statement that a tax plan would be coming on Wednesday, said the person, who asked not to be identified because deliberations are private.
And if Trump backs away from the controversial border-adjusted tax proposal, he risks damaging relations with Ryan, who’s staked considerable political capital on the measure. Beyond that, if his plan truly doesn’t pay for itself, Trump may find it hard to find broad support in Congress.
“A plan that has no offsets is not a thing,” Callas said. “It can’t begin to move through Congress. Members wouldn’t vote for it.”