Kate Davidson and Richard Rubin have an excellent article in today’s Wall Street Journal examining what President Trump’s economic advisors are now saying about how the President wants to allocate $2 trillion in budget benefits they think will result from faster economic growth. I wrote about this question Tuesday.

Trump Budget Director Mick Mulvaney testified at the House and Senate Budget Committees, while Trump Treasury Secretary Steven Mnuchin testified at the House Ways & Means and Senate Finance Committees. Director Mulvaney said President Trump was proposing that tax reform be debt-neutral without including the budget benefits that would result from faster economic growth, while Secretary Mnuchin said President Trump was proposing that tax reform be debt-neutral with including the budget benefits that would result from faster growth. These two views cannot both be true. I understood the Mnuchin position to be the Administration’s unified view before Tuesday’s budget release. The Mulvaney view is the only one consistent with the new budget documents. Davidson and Rubin are therefore correct when they write that the Mulvaney position would be a major fiscal policy shift for the President.

President Trump now has four options:

1. President Trump supports the position Director Mulvaney stated yesterday, consistent with the Trump budget release. Tax reform must be debt neutral, statically scored. The budget benefits of growth help the government reach balance in 2027, as presented in the just-released budget plan. Tax reform becomes dramatically more difficult to enact, since the President’s position now requires finding as much as $2 trillion* more revenue over 10 years from eliminating or scaling back tax preferences. That would mean either flipping to support a border adjustment tax and eliminating the deduction for interest expenses, or dramatically scaling back their proposed tax cuts from what they floated in April.
2. President Trump supports the position Secretary Mnuchin stated yesterday, consistent with the April tax reform release. Tax reform must be debt neutral, including the effects of growth. Director Mulvaney cannot count those additional revenues to help him balance the budget. He has to modify his budget proposal to cut a lot more spending ($496 B in 2027 to hit balance in that year) or he has to give up on balancing the budget.
3. President Trump splits the $2 trillion between the two goals. Mnuchin and Mulvaney each have to find more tax increases / spending cuts (respectively) to meet their stated goals of debt-neutral tax reform and a balanced budget.
4. Do nothing, remaining ambiguous and […]