President Donald Trump’s inaugural budget proposal claims to eliminate the nation’s deficit in 10 years, thanks largely to faster economic growth that it projects will come from the president’s sweeping tax cuts.
Never mind the overly optimistic projections on economic growth. Or that Trump’s tax overhaul has not happened yet. Even allowing for both, economists say Trump’s budget doesn’t add up.
The administration is counting on generating $2.1 trillion in additional revenue over 10 years from better economic growth. But Trump’s budget proposal leaves out the cost, or the revenue lost, from the massive tax cuts.
In other words, the economic gains the administration has said it would use to pay for tax reform are apparently also being counted on to pay for deficit reduction. Some people call that double-counting.
“You can’t use the same money twice,” said Marc Goldwein, a senior vice president for the Committee for a Responsible Federal Budget, a nonpartisan group that advocates keeping government budgets under control.
Lawrence Summers, former treasury secretary in the Clinton administration and top economic adviser to President Barack Obama, called it an elementary but “egregious accounting error.”
Douglas Holtz-Eakin, president of the right-leaning American Action Forum and former director of the Congressional Budget Office, said the proposal didn’t necessarily mean there was an outright omission or a double-counting.
It’s possible the administration is looking for such strong economic growth to drive significantly extra revenue from payroll taxes, he said, or it could be that Trump officials were using different base lines from which they were drawing their results. But on the face of it, he said, the budget and tax-plan numbers “don’t seem to match.”
The Committee for a Responsible Federal Budget has estimated that Trump’s plan to cut corporate and individual taxes would cost the federal government about $5.5 trillion over 10 years, adding more than $6 trillion to the national debt.
Details of Trump’s tax overhaul, however, are still being developed, and it’s possible the administration is assuming a revenue-neutral tax plan – although experts say big tax cuts never pay for themselves.
On Tuesday, Mick Mulvaney, Trump’s budget chief, didn’t provide a direct answer or explanation to questions about double-counting. Instead, he told reporters “you have to make assumptions about a budget.” He said one of the assumptions that wasn’t made was to take into account the uncollected taxes every year, which he said amounted to $486 billion last year.
“And we don’t assume an additional penny of that being closed as part of our tax reform,” said Mulvaney, director of the Office of Management and Budget.
Of the 3 percent annual economic growth assumption, Mulvaney, the former U.S. Rep. from South Carolina’s 5th District, responded that the Obama administration in its first couple of years had based its budget on growth of 4.5 percent.
In fact, Obama’s first budget proposal as president, in May 2009, assumed economic growth of between 4 percent and 4.6 percent for the budget years 2011 to 2013.
Since the Great Recession ended in mid-2009, the U.S. economy has been growing on average about 2 percent a year, and the Congressional Budget Office, the Federal Reserve and most private economists see the economy advancing at about 2 percent annually over the next 10 years.
Alice Rivlin, a former Fed vice chair and director of the Office of Management and Budget under Clinton, said it’s true the Obama administration’s growth assumptions proved too optimistic. But she noted those projections weren’t unreasonable for that time and period in the economic cycle.
Then, there was greater potential for growth with unemployment high and many more people than today available for work. Today, the economy is nearing its eighth year of expansion, and the jobless rate is 4.4 percent, at or near full employment.
With the aging of baby boomers, labor force growth slowing, and lackluster productivity gains, economists see the current moderate growth persisting for the foreseeable future.
“This has been a very long period of growth and we’re at the high end already,” Rivlin said. “If we are so lucky to have continuous, steady growth, it’s not likely to be at 3 percent or 4 percent or 5 percent.”