$2.3 trillion cost gap...

POLITICO analysis: At $2.3 trillion cost, Trump tax cuts leave big gap

By DAVID ROGERS

Between new cost estimates and the White House’s own budget numbers, the wheels are coming off Republican claims that President Donald Trump’s tax cuts will pay for themselves by generating increased growth and government revenues over the next decade.

“Not only will this tax plan pay for itself but it will pay down debt,” Treasury Secretary Steven Mnuchin famously boasted in September. But his own department’s analysts now peg the 10-year cost at $2.3 trillion given the administration’s assumption that tax breaks for individuals and large estates will be extended past 2025.

POLITICO’s own calculations, working entirely from data in the 2018 and 2019 budgets, indicate that the added revenues generated by the tax cuts themselves would fall substantially short of matching $2.3 trillion.

For the years 2018 to 2027, the shortfall ranges from $1 trillion to $1.3 trillion. In measuring for 2019 to 2028, the picture improves, but the 10-year shortfall still is between $700 billion to $1.1 trillion.

Using the same approach, POLITICO found the administration could reap extra revenue of $2.3 trillion by 2028 if the economy lives up to the assumed 3 percent average annual growth in the president’s budget — a full .8 percentage point increase over the White House’s starting baseline.

But that’s a gamble that rests on many moving pieces other than the tax cuts — such as now finding the resources for big infrastructure projects. Most important, perhaps, it means that even if successful, all the valuable economic growth will go to pay for the tax cuts — and not reduce the deficit.

“Their argument was you need to get growth up to help deal with the deficit,” said Jason Furman, who now teaches at Harvard after serving as a top economic adviser to President Barack Obama. “It turns out everything they are doing for growth isn’t going to help the deficit at all. It’s just going to repay the cost of the tax cuts.”

In testimony before Congress, Mnuchin has remained upbeat. But despite the secretary’s promises of transparency, his press office has rejected repeated requests from POLITICO for more guidance and detail regarding the work done by Treasury’s Office of Tax Analysis.

Indeed, the OTA figures — the most complete to date from the administration — became public only when Mick Mulvaney, director of the Office of Management and Budget, referenced them at the very end of a House Budget Committee hearing on Feb. 14.

Mulvaney was being pressed at the time by the committee’s ranking Democrat, Rep. John Yarmuth of Kentucky, to explain the dramatic drop in government receipts in his fiscal 2019 budget when matched against what the administration forecast last May.

That drop is exaggerated by the fact that OMB chose last year to claim substantial growth based on the president’s economic agenda but then assumed a “deficit neutral” tax bill. Yarmuth framed his question to focus on the 10 fiscal years in which the two budgets overlap: 2018-2027. Mulvaney responded by citing what he said were Treasury estimates that the tax bill would cost $1.8 trillion — accounting for a big part of the drop.

But the OMB director’s answer inadvertently added to the confusion since it turns out he was quoting figures for 2019 to 2028, which applied more directly to his new budget. A review of the scores from a compilation of administration sources clarifies the picture. The 10-year cost of the initial bill passed in December is in fact higher: $2 trillion for 2018 to 2027. For the years, 2019 to 2028, the cost drops to about $1.8 trillion — the figure Mulvaney used.

The differences are largely explained by simple math. The costs of the corporate tax cuts are smaller in the out years as some business breaks are schedule to be phased down. And the costs of the tax cuts for this current year, about $174 billion, drop out of the new budget window which begins in 2019.

The good news, for anyone confused, is that once the extensions are factored in these discrepancies fade. The 10-year cost in both cases evens out around $2.3 trillion.

As explained by Mulvaney in his House testimony, one reason the Treasury figures are higher is the department’s analysts took a dim view of one of the health care-related offsets which the Congressional Budget Office accepted. This was not entirely a surprise since CBO has seemed conflicted about the merits of those savings. But in the final deliberations, Republicans badly needed the offset to expedite passage.

Elsewhere the costs attributed to the business and individual tax breaks in the bill appear not so far removed from prior estimates by the Joint Committee on Taxation. In fact, one irony of the situation is that when the increased revenues — as calculated by POLITICO — are applied against the $2.3 trillion cost for 2018 to 2027, the net “macro” score is quite close to the $1 trillion estimate JCT predicted in December.

The JCT score was dismissed by the White House at the time. But many in the administration would argue that even then it was never their expectation that the tax cuts alone would pay for themselves.

Instead, that burden has always rested on the president’s larger economic agenda, officials say, especially deregulation and future infrastructure investments which will be needed to pick up the slack when the stimulus impact of the tax cuts begins to weaken.

“It has never been the administration’s position that the tax cuts would pay for themselves,” said a senior OMB official. “Our position has always been that the president’s economic program taken as a whole — the additional growth that would be generated from dereg[ulation], from infrastructure, etc., taken as the whole set of policies — will more than offset the cost of the tax cuts.”

Nonetheless it’s not an easy matter to break out the relative weight of these different elements.

“It’s explained fully in Chapter 8,” said a White House press aide, sending POLITICO off to read that portion of last week’s annual economic report of the president, prepared by the Council of Economic Advisers. But those pages do more to explain the rationale behind different pieces of the agenda than to specify their mathematical contribution to the .8 percent increase in growth assumed by the budgets.

To try to get some answers, POLITICO worked backward, beginning with each budget’s estimate of how much deficit reduction can be attributed to the growth generated by the president’s agenda.

Last May OMB assumed $2.060 trillion in deficit reduction for the years 2018 to 2027. For the same 10 years in the new 2019 budget, only $628 billion in deficit reduction is claimed.

As explained by the White House, the change simply comes from the fact that administration has now pocketed some of its agenda — like the tax cuts and early deregulation changes — and then baked them into the 2019 budget’s baseline.

“They become part of the baseline instead of the ‘policy’ forecast,” said a White House spokesperson for the CEA. “If tax reform passed and therefore became part of the baseline rather than policy forecast, then the policy forecast would change — even if the administration’s belief about the effects of a given economic policy priority remain unchanged.”

Following this explanation, the difference between the two budgets' estimates should give some clue then of how much the tax cuts represent as a catalyst for growth.

Based on OMB’s tables, the $2.060 trillion in 2018’s budget corresponds with .66 of a percentage point in added growth; the $628 billion in 2019 translates to .25 of a point. So the difference between the two — .41 of a point — is one measure for what the administration believes the tax cuts add.

Alternatively, the .25 can be subtracted from the full 0.8 percentage point of added growth assumed by the White House. The end result — .55 of a point — is an upper marker so to speak.

In making its calculations, POLITICO used both to provide some range for its estimates. From subsequent discussions with administration officials, this spread is not far from what the so-called Troika of OMB, CEA and Treasury actually agreed upon in coming up with the .8 percentage point increase.

But again, based on OMB tables, all fell short of yielding enough added revenues to reach the $2.3 trillion target.