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President Trump’s tax reform vs. his balanced budget

President Trump has a $2 trillion hole in his fiscal policy proposals. His numbers don’t add up. This creates a conflict between two of his fiscal policy goals: tax reform and balancing the budget.

Let’s look at three elements of President Trump’s economic policy and how they interact:

  1. Last month he proposed tax reform with most of the key numbers left blank.
  2. Today he proposed a budget that claims to reach balance in 2027 (year 10).
  3. His budget assumes his economic policies would increase economic growth by a lot, to 3 percent per year.

In addition to proposing a budget that purports to balance in year 10, today Trump Budget Director Mick Mulvaney told us one key new fact about tax reform: the Administration now assumes tax reform will be debt neutral. Director Mulvaney used this to explain why the President’s top fiscal priority, his tax reform proposal, which would involve trillions of dollars of changes to tax policies, was omitted from the President’s budget. This omission is, to say the least, odd.

There is significant public debate about whether Team Trump’s aggressive growth assumption is reasonable given the policies he has proposed. For now let’s set aside this critical question and pretend it’s reasonable. Let us assume President Trump’s economic advisors are right, that his policies would result in 3% real growth per year, and that this faster growth would benefit the budget. Let us further assume their estimate of the [budget] Effect of economic feedback is correct. You can see it in today’s budget proposal (Table S-2, near the bottom of page 26, which is page 32 of the PDF). President Trump’s advisors assume this faster economic growth will reduce the budget deficit by $496 billion in 2027, their target year for balancing the budget.

The President’s balanced budget claim depends on this $496 billion effect of economic feedback in year 2027. They assume almost $500 billion of government spending bills in 2027 will be paid from additional cash inflows that result from higher government revenues resulting from faster economic growth, rather than from cash borrowed from financial markets. Faster growth —> higher government revenues —> less need for government borrowing to pay spending bills —> lower deficits and debt & budget balance in year 10.

This $496 billion is a really big number for a single year. For comparison, it is almost twice […]

By | 2017-12-09T19:58:55+00:00 Tuesday, 23 May 2017|