A Tale of Two Bad Tax Plans

Grassroots Republicans have spent the last six years screaming at the top of their lungs that they want Washington to cut spending and reduce the national debt.  It has been the one hallmark of literally every insurgent campaign for Congress since 2010.  Much of the anger coming from the GOP that led to the rise of Trump was because of broken promises about cutting the deficit and the debt made by Congressional Republicans.

So, of course, in response to that anger and cynicism, the GOP has nominated a candidate whose tax plans will only make the deficit worse and the debt larger in the short term.

It doesn’t make a lot of sense, but nothing this cycle has really made much sense.  If there’s any more obvious example of the disconnect between reality and politics, this is it.

I know, I know. I’m talking about policy in a campaign that isn’t about policy. Yes, I know that looking for policy discussions in this campaign is like trying to find eloquent writing in a porn script. So, at the risk of injecting a little policy discussion in a campaign that has been completely bereft of any policy discussions, let’s look at Trump and Clinton’s plans.

Trump’s tax and spending plans are predicated on short-term revenue cuts designed to spur economic growth.  What does that mean?  It means cutting taxes – and thus federal government revenue – while praying that the tax cuts generate enough increased economic output to make up the difference.  What it also means is a short-term (relatively speaking – it could be a decade or more) spike in the federal budget deficit and an increase in the national debt, with the hope that you’ll make up the difference in the long run.

As John Maynard Keynes said, “[i]n the long run we are all dead.”

What Trump is proposing is the fiscal equivalent of taking out a loan to start a new business, on the hopes that you’ll make enough money to pay back the loan and have enough profit to survive and reinvest.  Not a bad plan – unless you’re already billions in debt and you’ve tried this before and it hasn’t worked.

This is what we did in 2003.  It didn’t work.  We went from a surplus to a over $3 trillion in deficits over the Bush years.  The economic growth was simply not sufficient to make up the shortfall in revenues coupled with increased spending for defense and national security.

One thing the federal government is very bad at is predicting how much revenue it will have per year.  That makes sense, because there’s no way to be sure who will pay their taxes on time, who won’t, which companies will go out of business, which will succeed, and so on.  Even raising taxes only provides a projected revenue number, and if the increase is high enough to spur people to start finding ways to avoid the taxes altogether – like Trump did – you could end up raising taxes and raising only a minuscule amount of revenue.

That’s why the Clinton proposal to raise taxes on the rich and corporations can’t possibly fund the major program increases she’s talking about.  One thing the rich can do easily is move assets around, and the richest are generally able to do what Trump does – shield income from taxation through tax shelters, creative usage of the net operating loss deduction, and donations to charity.  Corporations can off-shore profits.  There’s an entire industry of tax lawyers and corporate counsel who do just that, and it’s all legal. Clinton’s tax plan isn’t likely to raise enough revenue to off-set her increased spending.  It is likely that her plans, taken as a whole, will balloon the deficit and the debt, assuming any of them even pass.

At the same time, Trump’s tax plan is little better.  The goal of his tax plan is to spur economic growth to make up the loss in revenue that his tax cuts will foster.  Pence said it flat out last night in the debate –

“And when you get the economy growing, Elaine, that’s when you can deal with the national debt. When we get back to 3.5 percent to 4 percent growth with Donald Trump’s plan will do, then we’re going to have the resources to meet our nation’s needs at home and abroad, and we’re going to have the ability to bring down the national debt.”

This is fundamental supply-side economics, yet the last thirty years have been a mixed bag for supply-side economists, as major tax cuts rarely delivered on the promise of sustained economic growth.  There have been short-term bumps, but nothing sustained, which is what Trump needs to make his plan work.  At the same time, when the economy has taken off – as it did during the dot.com revolution – taxes had little to do with it.

Trump’s plans to use tax cuts to spur the economy to 4% growth sound good on paper, but the same plan didn’t work in 2003, and it wasn’t how we balanced the budget in the late 1990s, either.  Trump has also pledged to block any major changes to entitlement programs like Social Security and Medicare.  There’s not enough discretionary spending left, taking entitlement reform off the table, to balance the budget through cuts alone.  And given the difficulty in predicting the impact that tax cuts will have on revenue, coupled with Trump’s plans to increase spending on veterans and the military – already one of the largest chunks of discretionary spending – it’s as likely that Trump’s plans will also balloon the deficit and the debt, also assuming any of them pass.

So where does that land us?  For fiscal conservatives, neither option should be palatable.  After spending the last six years screaming at Washington that the national debt was too large, that Obama added too much debt too quickly, that the annual budget deficits were unsustainable and Congress needed to cut spending, the party of fiscal conservatism is running as our nominee a candidate whose plans will likely increase the debt and deficit in the short term – the exact opposite of what we’ve been demanding of the people we’ve sent to Congress.

The constant tinkering with the tax code – whether it’s from the Democrats trying to make everything “more fair” or from Republicans trying to spur economic growth – means that the rules change every year and there’s no stability.  The constant push from both sides to introduce new programs and new spending doesn’t help.  In the end, the best way for us to reduce the deficit and start paying down the debt is to leave the revenue side alone – don’t touch taxes at all for a couple of years – and allow the economy to grow, using interest rates to spur the growth, rather than tax cuts.  That, coupled with entitlement reform and some modest cuts to discretionary spending, is the only real way we’re going to address the deficit and the debt, and it’s going to take a long time.

GOP voters can’t have it both ways.  We can’t keep sending folks to Congress who demand spending cuts, while nominating for the White House somebody who is proposing the exact opposite.  And we can’t keep holding our Congressional leadership accountable for not addressing head on the spending problems when we send them mixed messages about how important we think those problems are.

Neither Trump nor Clinton are putting forth solid policy proposals that will address the debt and the deficit.  Don’t expect them to, or you’ll be disappointed.

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