Bloomberg Businessweek: Tax Cuts. As Easy As . . .

The following is an excellent article written by Peter Coy on the Bloomberg Businessweek website on May 4, 2017 titled “Trump’s Tax Math Has a Big Problem” which was published in the May 8 – May 14, 2017 issue of Bloomberg Businessweek on page 24 titled “Tax Cuts. As Easy As . . .” and I quote:

“Trump’s Tax Math Has a Big Problem”

A vote for tax cuts today is tantamount to a vote for tax hikes tomorrow.
May 4, 2017, 1:21 PM CDT
Photographer: Isaac Brekken/Getty Images

There’s a reason Treasury Secretary Steven Mnuchin keeps insisting that his boss’s tax-cut plan will fully pay for itself through faster economic growth. Budgetary politics make it hard for him to say anything else. Senate rules require 60 votes for any tax cut that would raise deficits beyond a window of 10 years from the date of passage. Conceding upfront that President Donald Trump’s plan would generate more red ink in the medium to long term would be accepting defeat before the legislative fight has even begun.

“This will pay for itself with growth and with reduction of different deductions and closing loopholes,” Mnuchin said at an April 26 briefing on the one-page outline of a tax plan. National Economic Council Director Gary Cohn didn’t go that far, though he did call the plan “a once-in-a-generation opportunity to do something really big.”

This equation is the transversality condition for a government budget. Debt is B, the present time is t, the economy’s growth rate is g, the future time period is s, and infinity is ∞. What all this means is that the present value of government spending has to be matched by the present value of all receipts … in other words, Trump’s tax plan is unsustainable.

Math is not on their side. The budgetary impact of tax legislation is scored by the nonpartisan staff of Congress’s Joint Committee on Taxation. Judging from its past calculations, the JCT is likely to agree with independent budget wonks, on the left and right, who have concluded that Trump’s plan would create a gusher of red ink. “No individual tax cut pays for itself,” says Alan Cole, an economist at the right-of-center Tax Foundation. “There has to be a strong mix of tax cuts and revenue-raisers—a good mix of both candies and vegetables. Right now I see things as a little short on vegetables.”

The Trump tax plan, because it generates deficits as far as the eye can see, violates what’s known as the transversality condition, which says that debt relative to the size of the economy cannot grow to infinity; fiscal policy is sustainable over the long run only if there will be surpluses in the future to offset deficits today. True, Keynesian-style tax cuts like President Barack Obama’s 2009 stimulus package also generate red ink, but they’re designed to phase out when the economy no longer needs the jolt.

What makes the Trump tax cuts violate the transversality condition is that they’re intended to be permanent. “If you propose a big tax cut without offsetting spending cuts, then it’s essentially an incomplete proposal,” says Eric Toder, co-director of the Tax Policy Center, a venture of the Urban Institute and Brookings Institution. “What you’re implicitly proposing is lower spending and higher taxes in the future.”

The federal budget was on the wrong track even before Trump took office. The Congressional Budget Office said on March 30 that, assuming current laws remain generally unchanged, federal debt held by the public would grow from 77 percent of gross domestic product now to 146 percent in 2046, with no end to the upward trend on the horizon. That’s unsustainable. “We have this enormous fiscal gap. We have to be cutting it, not raising it,” says Laurence Kotlikoff, a Boston University economist who harped on deficits when he ran for president last year as an independent.

Since Trump can’t credibly claim that his tax cuts will pay for themselves and not increase the deficit, he’s left with unpleasant options. One is to curtail his cuts in hopes of achieving a score of revenue neutrality from the JCT. He’s already dropped hints that he considers the one-pager as a starting point for negotiations, not a final demand. But while taking candy out of the tax package and adding vegetables would please the JCT, it would make it harder to pass the bill by creating some clear losers: If revenue is to be neutral, inevitably there will be groups whose taxes go up—such as New Yorkers and Californians who would lose the ability to deduct state and local income taxes.

A second option is to schedule the tax cuts to expire by the end of the JCT’s 10-year scoring period, so they can pass with a simple majority in the Senate. That’s what President George W. Bush did, although some of his cuts were later extended. But businesses don’t like to make investment decisions based on tax cuts that won’t last.

A tempting alternative is for Congress to change its rules. Senator Pat Toomey, a Pennsylvania Republican, issued a press release on April 26 disdaining “arbitrary budget constraints” and suggesting that it might not be necessary to make Trump’s tax plan revenue-neutral at the end of 10 years. “There are ways to navigate these obstacles,” the statement said, “including the use of a longer horizon,” meaning more time for cuts to generate growth and become revenue-neutral. The Wall Street Journal reported on May 2 that a senior administration official said in late April that no rule requires the window for scoring tax proposals to be 10 years long. A scoring window of 20 or 30 years wouldn’t magically make a deficit-generating tax cut into a surplus-generating one, but it would please businesses by giving them low tax rates for longer.

A third option is to press hard on the argument that any revenue losses are temporary and will be made up as the tax cuts boost economic growth. This is Mnuchin’s case. Likewise, Vice President Mike Pence said on Meet the Press on April 30 that deficits could grow “maybe in the short term,” but added, “If we don’t get this economy growing at 3 percent or more, as the president believes that we can, we’re never going to meet the obligations that we’ve made today.”

Pence is right that stronger growth would solve a host of problems. This is where things get interesting. Suppose that Trump’s tax cuts raise economic growth over the long term, just not enough to fully pay for themselves. Deficits would rise. But if—hypothetically—debt grew more slowly than the economy, debt would shrink in relation to GDP, making it easier to bear. The tax cuts, despite not being revenue-neutral, would bring the budget closer to satisfying the transversality condition—i.e., being sustainable.

Mnuchin hinted at one point in the April 26 briefing that debt sustainability, not revenue neutrality, was the right standard by which to judge Trump’s tax cuts. He said that “this plan is going to lower the debt-to-GDP” ratio. Expect to hear more of that kind of talk in future GOP messaging.

The bottom line: Trump’s plan to cut taxes might lead to higher GDP growth, but without spending cuts it will certainly increase the deficit.”

(I AGREE WITH THE ARTICLE, REPUBLICAN PRESIDENT DONALD TRUMP’S TAX PLAN, THE MATH DOES NOT COMPUTE.  WHEN YOU ARE GOING FROM SEVEN BRACKETS DOWN TO THREE AND LOWERING THE TOP BRACKET FROM 39.6 PERCENT TO 35 PERCENT, AS WELL AS LOWERING THE CORPORATE RATE TO 15 PERCENT, WILL JUST HELP THE RICHEST CORPORATIONS AND INDIVIDUALS, CONSISTING OF THE ONE OR TWO PERCENT AND CREATING A BIGGER DEFICIT AND DEBT, WHICH IS WHAT THE REPUBLICANS USED TO CALL BEING CONSERVATIVE AND LIVING WITHIN YOUR MEANS AND ALL OF A SUDDEN, BEING FORGOTTEN AND BEING IGNORED, JUST BECAUSE THEY FEEL THEY CAN GET AWAY WITH IT, STARTING WITH THE CORRUPT, UNREGULATED, BIG INVESTMENT BANKS, GOING TO A POORER HEALTHCARE PROGRAM WITH TRUMPCARE, AND STILL FAVORING THE RICH INSURANCE COMPANIES.  YOU CAN EASY UNDERSTAND WHY THE RICHEST 400 INDIVIDUALS IN THE FORBES 400 ISSUE, AS WELL AS THE BIG CORPORATIONS, ARE CONSTANTLY BRAGGING ABOUT THEIR WEALTH INCREASING SO FAST.  BY IGNORING THESE FACTS, DOES OUR COUNTRY REALLY WANT TO GET INTO THE PROBLEMS OTHER COUNTRIES AROUND THE WORLD WITH ALL THE UNREST AND WARS THEY ARE HAVING?  JUST BECAUSE THE  ELITIST ARE TRYING TO DODGE THEIR FEDERAL INCOME TAX RESPONSIBILITY BY LOWERING THEIR RATES AND CREATING MORE TAX LOOPHOLES BY HIDING THEIR MONEY OFFSHORE, WHICH SHOULD BE ILLEGAL AND THEY SHOULD BE JAILED ON THAT.

LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

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About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog (my.barackobama.com) and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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