Thursday, August 11, 2016

Adventures in economics: Trump tax plan edition

So the original Donald Trump tax plan was a massive revenue loser, even with generous dynamic scoring. Then came word Team Trump was tweaking it to reduce the revenue loss from $10 trillion ($12 trillion without dynamic effects) to $3.8 trillion (with dynamic effects). (This is a greatly simplified timeline.)
Now he is reverse-tweaking it. But what would those tweaks have looked like, beyond reducing cost?
Donald Trump at a campaign rally in Eugene, Oregon, U.S. on May 6, 2016.   REUTERS/Jim Urquhart.
Donald Trump at a campaign rally in Eugene, Oregon, U.S. on May 6, 2016. REUTERS/Jim Urquhart.
From New York Times reporter Jackie Calmes, who interviewed Kyle Pomerleau of the Tax Foundation, the consultancy that’s been modeling the plan:
Describing the tentative revisions of the plan provided to Tax Foundation analysts, Mr. Pomerleau said Mr. Trump’s original three tax brackets for individuals — with marginal tax rates of 10, 20 and 25 percent — would be raised to 15, 25 and 28 percent. The current tax code has seven brackets ranging from 10 to 39.6 percent. Another change would shrink the standard deduction that benefits most taxpayers — to a proposed $10,000 for an individual filer from Mr. Trump’s original $25,000 deduction, which would have been nearly four times as generous as current law. “Once you raise those marginal rates and drastically shrink the standard deduction, the benefits to the middle class basically go away,” Mr. Pomerleau said. “You’re only giving them to the top. So it’s unlikely that he would want to do that. It wouldn’t match up with the rhetoric he’s been using.”


So a less monstrous budget buster but more supply-sidery (sorry, middle class.) But if we are back to the original plan, then we are back to the tsunami of red ink — despite Trump’s claims he could balance the budget and pay off the national debt in eight years. Or even create a massive budget surplus! The WSJ’s Greg Ip is skeptical:
Sam Clovis, his policy director, told a conference Wednesday that Mr. Trump’s plans would generate a $4.5 trillion to $7 trillion surplus. He claimed they would generate $7 trillion in new revenue by raising growth from its 1.4% average of the last decade by two percentage point. Mr. Clovis’ analysis is riddled with holes. The Congressional Budget Office projects $9 trillion in deficits over the coming decade. Adding Mr. Trump’s tax cut would make that $19 trillion. Even if it generated $7 trillion in new revenues, that doesn’t turn a $19 trillion deficit into a $7 trillion surplus. And it’s not going to generate $7 trillion in new revenue. The Tax Foundation already assumes Mr. Trump’s plan lifts growth by about one percentage point over a decade (without that, the cost would be $12 trillion). And that’s optimistic; the Tax Foundation is more bullish on the effects of lower taxes than most economists. Unlike the CBO, it doesn’t think all that borrowing will drive up interest rates and depress investment.
Tax reform is hard! At least it is when we are trying to massively reduce taxes for everyone, increase economic growth, and balance the budget. Serious policymakers know something has to give.