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:
- 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.
- 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.
- 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.
- Do nothing, remaining ambiguous and internally inconsistent. They stick with the mutually inconsistent policies and the $2 trillion double-count, and try to duck / ignore / power through the questions that point out this logical and arithmetic contradiction. The likely outcome is that House and Senate Republicans ignore the President’s inconsistent policies and make their own policy choice on this question. I’d guess they’d lean toward the Mnuchin approach, dynamically scoring tax reform and reaching a balanced budget by cutting spending more than the President proposes.
It is unclear to me why Director Mulvaney and Secretary Mnuchin are saying opposite things here. Does this reflect a policy disagreement between the two men that still needs to be resolved by the President, and we are seeing that disagreement play out in public? Does it reflect a new policy direction (debt-neutral tax reform, statically scored) to which Secretary Mnuchin has not yet adjusted his public rhetoric? Does it reflect a coordinated intentional choice to try to have it both ways so that the President did not have to make another $2 trillion of hard policy choices?
This is important. The principle of honest budgeting is amplified by the size of this hole and its impacts on core elements of the president’s economic agenda. Two trillion dollars is a lot of money, and the decisions yet to be made affect the chances for enacting tax reform and a balanced federal budget.
* Correction to my “$2 trillion hole” number — Team Trump says that faster growth resulting from all the President’s policies, in total, will improve the budget picture by $2 trillion over the next decade, and they incorporate that full amount in their balanced budget plan, including $496 billion in the balance year of FY 2027. Traditional dynamic scoring of a tax reform would incorporate the budget benefits of only that additional economic growth which results from tax reform. If some fraction of the faster growth would result from non-tax policies (including regulatory reform, increased energy supply, infrastructure spending), then (traditionally) one could not “use” that to offset tax reform. This means that while Director Mulvaney could and did incorporate the full $2 trillion in his balanced budget plan, traditional scoring rules might allow Secretary Mnuchin to include something less than the full $2 trillion to offset gross tax cuts, if the President were to head in that direction. None of the Administration’s language reflects this difference, and it is secondary to the core problem the Administration faces, but I want to be as accurate as I can be in my explanation.