Budget a Challenge for Trump Tax Plan 04/25 06:09
President Donald Trump plans to stick with his campaign pledge to slash the
corporate tax rate from 35 percent to 15 percent, but the dramatic cut raises a
problematic question for the White House: How can the president deliver the
"massive" tax cut he promised without also blowing a massive hole in the budget?
WASHINGTON (AP) -- President Donald Trump plans to stick with his campaign
pledge to slash the corporate tax rate from 35 percent to 15 percent, but the
dramatic cut raises a problematic question for the White House: How can the
president deliver the "massive" tax cut he promised without also blowing a
massive hole in the budget?
A senior administration official confirmed the planned reduction to
corporate rates, speaking on condition of anonymity in order discuss details of
the plan the president is expected to unveil Wednesday.
Most outside economic analyses say the type of tax cuts being promoted by
Trump would likely fuel even larger deficits for a federal government already
projected to see its debt steadily rise. The lowered tax rates are also
unlikely to generate Trump's ambitious promised growth rate of 3 percent a
year, roughly double the 1.6 percent growth achieved last year. These two
factors are related because the Trump administration is counting on faster
economic growth to produce additional tax revenues that could then close the
deficit. The concept was popularized as "trickle-down" economics during the
The problem is that the economy can't grow quickly enough to cover the
likely hole in the deficit.
"There's no pure tax cut that pays for itself," said Alan Cole, an economist
at the right-leaning Tax Foundation.
Trump has promised to release the outlines of his tax plan Wednesday and has
said the plan would give Americans a tax cut bigger than "any tax cut ever."
During the campaign, he backed cutting the corporate tax rate --- and the
personal income tax rate to 33 percent from a top marginal rate of 39.6 percent.
Although he did not disclose details, Treasury Secretary Steven Mnuchin said
Monday the lower tax rates would generate so much economic growth that it would
hold the deficit in check.
"The tax reform will pay for itself with economic growth," Mnuchin said at
the White House news briefing, adding that the overhaul would ideally let
someone file taxes on a "large postcard."
By running the risk of higher deficits, the Trump plan could damage the
credibility of Republican lawmakers who spent years railing against the rising
national debt under former President Barack Obama. Trump could also make it
harder to pass lasting tax reform, since any policy that increases the debt
above its baseline either requires Democratic support or --- if passed by a
slim majority of Republicans in the Senate --- would expire in a decade. The
House Republican tax blueprint tried to offset the lower rates by introducing a
new tax system that applies to imports.
Mnuchin and White House economic adviser Gary Cohn are scheduled to meet
with congressional leaders Tuesday evening to talk about the president's tax
plan. They are expected to meet with Senate Majority Leader Mitch McConnell,
R-Ky., House Speaker Paul Ryan, R-Wis., Senate Finance Committee Chairman Orrin
Hatch, R-Utah, and House Ways and Means Committee Chairman Kevin Brady, R-Texas.
Hatch and Brady will be key players in Congress as lawmakers try to tackle a
Trump's announcement Friday that he would unveil a tax plan this week caught
lawmakers by surprise, despite regular conversations among Mnuchin, Cohn and
congressional leaders, said a congressional aide. The aide, who spoke on
condition of anonymity, was not authorized to speak publicly about the issue.
Without a proposal on the table, the White House has been vague about the
president's support for ideas circulating in Congress.
It's unclear whether the president favors the House Republican blueprint's
border adjustment tax system, which would lower corporate rates to 20 percent
by essentially taxing imports and excluding U.S. exports.
Trump told Fox Business News that he prefers a "reciprocal" tax in which any
tariffs, duties or taxes would match what trading partners charge.
Most economists say it's unlikely that tax cuts can generate enough gains to
avoid swelling the government's red-ink problem --- estimated to total $559
billion this year. They also have recent real-world examples to make their
case: Tax cuts in Kansas made by Gov. Sam Brownback failed to deliver the
expected boost, forcing the state into years of grueling budget battles and
harsh spending cuts to make up the gap.
The benefits of the tax cuts could also be limited by economic forces beyond
Trump's immediate control.
The Federal Reserve could raise short-term interest rates, investors might
charge the government higher borrowing costs and a stronger dollar could temper
growth through exports, said Mark Doms, a senior economist at the bank Nomura.
"Doing some kind of tax cut might boost growth a bit, but there are forces
that would counteract the tax cut," Doms said.
Tax reform would likely have a modest effect on growth, almost surely not
enough to match the administration's 3 percent growth target, said Mark Mazur,
director of the nonpartisan Tax Policy Center and a former assistant treasury
secretary for tax policy in the Obama administration. Major tax cuts might also
provide a short-term boost, but they would likely produce additional debt that
would dampen growth in the future.
"The laws of arithmetic kind of catch up to you," Mazur said.