The Trump administration’s magical thinking on taxes would bust the budget

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President Trump is set to reveal the outlines of a tax reform plan Wednesday. The country will be improved if Mr. Trump leads the way toward lower rates, fewer loopholes and a simpler code. Where the plan could go dangerously astray is if the administration bases it on wishful thinking — specifically, that tax-cutting will pay for itself.

Specifics have been sketchy in the run-up to Wednesday’s announcement, in part because administration officials appear to be of different minds. But a few details emerged early in the week. The Wall Street Journal reported that Mr. Trump wants to reduce the corporate tax rate from 35 percent to 15 percent and the top tax rate on so-called pass-through companies from 39.6 percent also to 15 percent. According to the nonpartisan Tax Policy Center, slashing the corporate rate by such a large amount would reduce revenue by $2.4 trillion over a decade, which is half of everything the government will spend in fiscal 2017. Cutting the tax on pass-throughs, meanwhile, would boost tax avoidance by encouraging people to take wages in the form of lower-taxed pass-through income. 

There are several honest ways out of the resulting budget hole: end or limit tax breaks such as the mortgage-interest deduction; raise the rates of other taxes; cut spending; or some combination. The dishonest way is to pretend the hole is shallower than the experts predict it will be — or even that the hole does not exist. That was the approach Treasury Secretary Steven Mnuchin appeared to be taking last Thursday. “The plan will pay for itself with growth,” Mr. Mnuchin said, claiming that the Trump economic program could goose the economy so much that the government would recoup nearly $2 trillion over 10 years. He may be preparing some limits on deductions, but not nearly enough.

This is magical thinking. Of course cutting taxes or increasing federal spending affects the economy, but experience shows that tax cuts are almost never self-financing. If the Trump administration used optimistic economic growth assumptions to justify a deficit-enhancing tax cut, “I would start drinking earlier every day,” leading GOP economist Douglas Holtz-Eakin told The Post’s Damian Paletta and Max Ehrenfreund. 

There is another dishonest way to ignore the budget arithmetic: pretend the hole doesn’t matter. The Journal reported that Mr. Trump may be taking this approach, ordering his staff to stick to the 15 percent corporate tax goal even if it would expand deficits. In fact, a deficit-raising tax cut would eventually harm economic growth by driving up government debt. As the population ages, the country is already on track to borrow more and squeeze spending for everything except interest on the debt, pensions and health care: national parks, the FBI, defense, schools and more. It would be the height of imprudence to worsen the problem, whether based on phony math or sheer heedlessness.

For eight years, Republicans mercilessly attacked President Barack Obama for doing too little to cut federal deficits. Will they really turn around now and approve a budget-busting tax cut?

This piece was originally published at the Washington Post.

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