How Trump's tax cut plan would blow up the deficit


Tax and budgetary policy experts are divided on the impact that President Trump's proposal to slash the corporate income tax rate from 35 percent to 15 percent would have on the federal budget and the broader U.S. economy. Some think it would be bad. Others believe it could be catastrophic.

According to the Congressional Budget Office, the Treasury will take in about $3.4 trillion in tax revenue in 2017, the vast majority of it coming from the personal income tax and payroll taxes. Business taxes, estimated to total $320 billion this year, make up just 9.4 percent of total tax revenues. Trump's proposal, slashing the corporate rate by more than half, would drive the projected revenues from corporate taxes down to something more like $120 billion, or about 3.5 percent of total federal tax revenues.

Related: The Best and Worst States for Taxes in 2017

While that may seem like a relatively small change, in a budget that is already in perpetual deficit that $200 billion gap in the first year (absent any yet-to-be-revealed plan to offset the cost of the plan with spending cuts or other revenue) would have to be financed by government borrowing, adding between $2 and $2.5 trillion to the national debt over a decade.

Scenes from the Tax March 2017:

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People march demanding President Donald Trump release his tax returns, in New York, U.S., April 15, 2017. REUTERS/Lucas Jackson
People march demanding President Donald Trump release his tax returns, in New York, U.S., REUTERS/Lucas Jackson
People march demanding President Donald Trump release his tax returns, in New York, U.S., REUTERS/Lucas Jackson
NEW YORK, NY - APRIL 15: Activists take part in a Tax Day protest on April 15, 2017 in New York City. Thousands of activists march to Trump Tower to demand that President Donald Trump release his tax returns. Photo by VIEWpress/Eduardo MunozAlvarez
NEW YORK, NY - APRIL 15: Activists take part in a Tax Day protest on April 15, 2017 in New York City. Thousands of activists march to Trump Tower to demand that President Donald Trump release his tax returns. Photo by VIEWpress/Eduardo MunozAlvarez
NEW YORK, NY - APRIL 15: People take part in a Tax Day protest on April 15, 2017 in New York City. Thousands of activists march to Trump Tower to demand that President Donald Trump release his tax returns. Photo by VIEWpress/Eduardo MunozAlvarez
MIDTOWN MANHATTAN, NEW YORK, UNITED STATES - 2017/04/15: Demonstrators in New York City rallied at Bryant Park in Midtown Manhattan before march to Trump Tower as part of a nationwide series of demonstrations to demand the release of President Donald J. Trump's past income tax returns. The march coincides with the deadline for filing 2016 income tax returns in the United States. (Photo by Albin Lohr-Jones/Pacific Press/LightRocket via Getty Images)
NEW YORK, NY - APRIL 15: Activists take part in a Tax Day protest on April 15, 2017 in New York City. Thousands of activists march to Trump Tower to demand that President Donald Trump release his tax returns. Photo by VIEWpress/Eduardo MunozAlvarez
MIDTOWN MANHATTAN, NEW YORK, UNITED STATES - 2017/04/15: Demonstrators in New York City rallied at Bryant Park in Midtown Manhattan before march to Trump Tower as part of a nationwide series of demonstrations to demand the release of President Donald J. Trump's past income tax returns. The march coincides with the deadline for filing 2016 income tax returns in the United States. (Photo by Albin Lohr-Jones/Pacific Press/LightRocket via Getty Images)
Demonstrators hold signs and march towards City Hall during the Tax March Los Angeles in Los Angeles, California, U.S., on Saturday, April 15, 2017. The Tax March is an organized nation wide protest, held on the traditional deadline date to file taxes, that seeks to promote transparency by calling on U.S. President Donald Trump to release his personal tax returns. Photographer: Troy Harvey/Bloomberg via Getty Images
Demonstrators hold signs and march towards City Hall during the Tax March Los Angeles in Los Angeles, California, U.S., on Saturday, April 15, 2017. The Tax March is an organized nation wide protest, held on the traditional deadline date to file taxes, that seeks to promote transparency by calling on U.S. President Donald Trump to release his personal tax returns. Photographer: Troy Harvey/Bloomberg via Getty Images
CHICAGO, UNITED STATES - APRIL 15: Demonstrators participate in a march and rally to demand President Donald Trump release his tax returns in Chicago, Illinois, United States on April 15, 2017. 15 April is the traditional day that US federal income taxes are due unless the date falls on a weekend. Similar protests were planned in cities across the country. (Photo by Bilgin Sasmaz/Anadolu Agency/Getty Images)
CHICAGO, UNITED STATES - APRIL 15: Demonstrators participate in a march and rally to demand President Donald Trump release his tax returns in Chicago, Illinois, United States on April 15, 2017. 15 April is the traditional day that US federal income taxes are due unless the date falls on a weekend. Similar protests were planned in cities across the country. (Photo by Bilgin Sasmaz/Anadolu Agency/Getty Images)
CHICAGO, UNITED STATES - APRIL 15: Demonstrators participate in a march and rally to demand President Donald Trump release his tax returns in Chicago, Illinois, United States on April 15, 2017. 15 April is the traditional day that US federal income taxes are due unless the date falls on a weekend. Similar protests were planned in cities across the country. (Photo by Bilgin Sasmaz/Anadolu Agency/Getty Images)
CHICAGO, UNITED STATES - APRIL 15: Demonstrators participate in a march and rally to demand President Donald Trump release his tax returns in Chicago, Illinois, United States on April 15, 2017. 15 April is the traditional day that US federal income taxes are due unless the date falls on a weekend. Similar protests were planned in cities across the country. (Photo by Bilgin Sasmaz/Anadolu Agency/Getty Images)
NEW YORK, NY - APRIL 15: People participate in a Tax Day protest on April 15, 2017 in New York City. Activists in cities across the nation are marching today to call on President Donald Trump to release his tax returns. (Photo by Stephanie Keith/Getty Images)
Protestors take part in the 'Tax March' to call on US President Donald Trump to release his tax records on April 15, 2017 in Washington, DC. / AFP PHOTO / MANDEL NGAN (Photo credit should read MANDEL NGAN/AFP/Getty Images)
Protestors take part in the 'Tax March' to call on US President Donald Trump to release his tax records on April 15, 2017 in New York. / AFP PHOTO / KENA BETANCUR (Photo credit should read KENA BETANCUR/AFP/Getty Images)
NEW YORK, NY - APRIL 15: People participate in a Tax Day protest on April 15, 2017 in New York City. Activists in cities across the nation are marching today to call on President Donald Trump to release his tax returns. (Photo by Stephanie Keith/Getty Images)
WASHINGTON, DC - APRIL 15: Tax Day demonstrators march to the Lincoln Memorial April 15, 2017 in Washington, DC. Activists gathered in cities nationwide to demand President Donald Trump release his tax returns. (Photo by Aaron P. Bernstein/Getty Images)
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One of the arguments that the Trump administration has floated with regard to its tax reform strategy is that tax cuts will pay for themselves by generating enough economic growth to raise tax revenue by an amount that offsets the cut. That's a notion that even conservative-leaning scholars aren't buying, at least in this case.

Alan Cole, an economist at the right-leaning Tax Foundation, ran the numbers and concluded that in order to pay for itself within the frame of a 10-year budget window, the administration's dramatic reduction in corporate taxes would need to generate 0.9 percent additional economic growth every year. That's growth on top of growth produced by other factors, resulting in an economy that is about 9 percent bigger at the end of a decade than it would have been without the corporate rate cut.

But according to the Tax Foundation's model, that's not likely to happen.

Related: Why Pro-Business Republicans May Not Embrace Trump's Massive Tax Cut

"The Tax Foundation's Taxes and Growth model would not predict 0.9 percent added growth over the budget window from a corporate rate cut to 15 percent," Cole wrote in a blog post scheduled to be published on Tuesday. "The model predicts something more like 0.4 percent over the budget window, reaching a final long-run change of 4.3 percent."

Barring a massive influx of immigrants -- something not likely under the anti-immigration Trump administration -- there just isn't a lot of room for extra growth in the U.S. economy. The country is at close to full employment, meaning that what will drive the most economic growth in coming years is a rise in productivity.

"Unfortunately," Cole explains, "productivity growth has relatively low variance, historically. It usually grows between 1 and 2 percent per year. Policy can probably help us stay towards the higher end of that range, but a single policy is unlikely to move productivity growth for the whole economy by a whole percentage point."

But failing to pay for itself could be less of a problem for Trump's tax cut than some of its other effects.

Related: Can Trump's Wall Pay for Itself?

Adding $2.5 trillion to the federal debt over ten years would, all by itself, increase the debt by about 8 percent of U.S. GDP, according to Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. And the follow-on effects on interest rates would make the increase even more dramatic.

Increasing federal borrowing by a large amount will, all things equal, put upward pressure on interest rates, leading to a rise in the percentage of federal outlays going to debt service. However, there will also be outside forces driving up rates, like the Federal Reserve Board's Open Market Committee, which has initiated a years-long plan to gradually push rates higher.

CBO already projects that federal interest payments will more than double over the next 10 years, from 1.3 percent of GDP to 2.7 percent. Adding trillions of additional debt to that figure would only drive that percentage higher.

Additionally, it is unclear right now just how broadly the new 15 percent rate would apply. The majority of small businesses in the U.S. are structured as pass-throughs, which means the owners pay personal income taxes on their profits.

Related: Why Fake Tax Collectors Are Worse This Year

Trump has, in the past, suggested that those businesses should also benefit from cuts to the corporate tax rate. CRFB's Goldwein said that if Trump means for his business tax cut to apply to pass-throughs as well, it would take an additional $1 trillion to $2 trillion out of the federal revenue stream over the next decade.

"This would be really expensive for a variety of reasons," Goldwein said. In addition to increasing borrowing costs, he said, it could drive what economists call income-shifting.

Currently, the top marginal tax rate for personal income tax filers is 39.6 percent. If owners of pass-through businesses are suddenly allowed to pay what amounts to a 15 percent flat rate on their income, there would suddenly be a lot more pass-through businesses in the U.S.

"I might quit my job here and start Marc Goldwein Consultants," Goldwein said. "I could charge the Committee for a Responsible Federal Budget a consulting fee and pay myself as a business so that I could pay the 15 percent rate."

Related: Trump's First 100 Days: Here's What He Has — and Mostly Hasn't — Done

The call for a major cut to business taxes also appears to signal that the administration is not interested in pursuing a wholesale change of how the U.S. taxes businesses by switching to a border-adjustable sales tax. The measure, popular among House leadership, would be similar to the sort of value-added tax common in Europe.

And jettisoning the House leadership's preferred plan won't be the administration's only problem with Congress if it moves forward with this plan.

The current objective, GOP leaders have said, is to fold tax changes into a budget resolution later this year, allowing the Republicans in the Senate to pass them as part of a budget reconciliation package.

However, Senate rules don't allow reconciliation bills to increase the deficit beyond a 10-year window, which means that even if Trump were successful in seeing his business tax cut passed, he would have to accept the fact that it would expire after 10 years.

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