Double-Counting Growth

How does President Donald Trump’s proposed budget reach a balance in 10 years, as the administration says it will?

With 3 percent economic growth, says Mick Mulvaney, director of the White House Office of Management and Budget.

How does Trump plan to deeply cut taxes without reducing federal revenues?

Economic growth, says Steve Mnuchin, secretary of the treasury.

Wait a minute, say tax and budget experts, that’s double-counting the same money.

“The same money cannot be used twice,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

When the White House unveiled Trump’s proposed fiscal 2018 budget, Mulvaney boasted that it reaches a balance within 10 years — meaning that it no longer runs a deficit or adds to the country’s debt.

Mulvaney, May 23: It’s new in that it balances for the first time in at least 10 years. The last time we looked, we couldn’t find a President Obama budget that balanced ever. I think he tried a couple times to convince us that primary balance, which was balance without regard for interest payments on the debt, was balanced. We reject that. We get to an actual balance on this budget within the 10-year window.

In order to reach that goal, the White House assumes “sustained, 3 percent economic growth,” Mulvaney said. The nonpartisan Congressional Budget Office projects a more modest expansion of gross domestic product at an average annual rate of 1.9 percent during the second half of the next 10-year period. Mulvaney said that kind of growth would never allow the country to balance its budget.

Mulvaney, May 23: If you assume 1.9 percent growth, my guess is you’ll never see a balanced budget again. So we refuse to accept that that’s the new normal in this country. Three percent is the old normal. Three percent will be the new normal again under the Trump administration. And that is, part and parcel, one of the foundations of this budget.

In addition to assuming annual economic growth of 3 percent, the president’s budget “assumes deficit neutral tax reform, which the Administration will work closely with the Congress to enact.” We don’t know what kind of tax reform Congress might enact, if any, but when the administration last month outlined Trump’s tax plan, administration officials assured that despite large corporate and individual tax cuts, it would not add to the deficit.

At a press briefing on the tax plan last month, Mnuchin said the tax plan would be revenue-neutral, in part, because it would stimulate growth to bring in enough extra revenue to offset the cuts.

Mnuchin, April 26: This will pay for itself with growth and with reduced — reduction of different deductions and closing loopholes.

But budget experts say Trump can’t have it both ways. Either the growth pays for the tax cuts, or it pays for bringing the budget to balance. It can’t do both.

In a statement on Trump’s budget, Taxpayers for Common Sense President Ryan Alexander said, “These same growth projections are what the administration was counting on to pay for tax reform, but they’re not accounted for in here as such.”

MacGuineas, president of the Committee for a Responsible Federal Budget, noted in a press release the same “inconsistency.”

MacGuineas, May 22: The budget also uses the entirety of the dynamic revenue from growth to pay down the debt – a move that we support but that is inconsistent with their past statements that economic growth would help pay for tax reform. The same money cannot be used twice.

The Trump budget makes deep cuts to discretionary spending (offset some by increases to the military), but those cuts aren’t enough to balance the budget, Roberton Williams of the Tax Policy Center told us. Balancing the budget also would require growth to create additional revenue.

But you can’t assume growth will balance the budget and offset tax cuts, Williams said.

“Both of those are not plausible,” Williams said. “They are counting it twice.”

In a blog post for the Washington Post, Lawrence Summers, who served as treasury secretary under President Clinton and director of President Obama’s National Economic Council, called it “an elementary double count” and “the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them.”

Summers, May 23: Apparently, the budget forecasts that U.S. economic growth will rise to 3.0 percent because of the administration’s policies — largely its tax cuts and perhaps also its regulatory policies. Fair enough if you believe in tooth fairies and ludicrous supply-side economics.

Then the administration asserts that it will propose revenue neutral tax cuts with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count. You can’t use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least you cannot do so in a world of logic.

Asked about Summers’ claim of double-counting, Mulvaney said it was necessary to make assumptions about “a document that will look 10 years into the future.”

The administration could have assumed tax reform would be revenue neutral, or that it would reduce or add to the deficit. “Given the fact that we’re this early in the process about dealing with tax reform,” Mulvaney said, “we thought that assuming that middle road was the best way to do it.”

Mulvaney did not directly address the inconsistency between those two plans, but he went on to say that “one of the assumptions we didn’t make was that we didn’t close any of the tax gap.”

The tax gap is the difference between total taxes owed and the actual taxes paid on time. In 2016, Mulvaney said, that gap was $ 486 billion, “almost enough to close the deficit that year. And we don’t assume an additional penny of that being closed as part of our tax reform.” With a simpler tax code such as Trump has proposed, he said, it is reasonable to assume a reduction in the tax gap.

Williams, of the Tax Policy Center, doesn’t see anything in the Trump tax plan that would close the tax gap nearly enough to be able to offset the deficit.

“You’d need a big change to incentivize people from not hiding money,” Williams said. And if Trump administration officials really thought their plan would cut into the tax gap, Williams said, then they would have made it part of the budget plan.

Taxpayers for Common Sense also points out that while the Trump tax plan calls for abolishing the estate tax, the budget includes the revenue from that tax over the next 10 years anyway. In fact, the proposed budget says tax reform should “abolish the death tax, which penalizes farmers and small business owners who want to pass their family enterprises on to their children.” And yet, TCS notes, the proposed budget includes $ 328 billion in revenue from the estate tax between 2018 and 2027, the very same amount under “current law.” In other words, the budget counts the estate tax revenue while arguing for its demise.

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