Tax Policy: Hard Numbers

Tax policy: Hard numbers

Trump Beat

May 19, 2017

Remember back in March, when tax reform was the next big item on the Republican agenda, and Treasury Secretary Steve Mnuchin predicted the process would be comparatively simple? That feels like a long time ago now. On Wednesday, Politico’s Ben White reported that Wall Street saw the prospects for a major tax overhaul as “all but dead” in 2017. The New York Times’s Alan Rappeport followed up with a story saying the chances for a deal were “fading.”

Tax reform’s immediate problem is the spiraling Russia-Flynn-Comey morass, which has left little space for the delicate dealmakingrequired to forge a tax plan. Getting a plan through Congress before the end of the year was always ambitious, especially once Trump decided to prioritize the Republican health care bill. The Russia investigation will be a further drag on both Congress’ time (especially if there end up being hearings on the Comey firing or related issues) and Trump’s leverage (especially if his approval ratings keep falling). The same problems could endanger other Trump priorities such as infrastructure spending and, possibly, health care reform.

But the truth is that tax reform was in trouble even before the latest round of wild headlines. Republicans face a simple math problem: They want to cut taxes by trillions of dollars, and they need some way to pay for it. Trump has ruled out cutting spending on Social Security, Medicare or the military, which makes paying for tax cuts via spending cuts all but impossible. House Speaker Paul Ryan wanted to raise revenue through a complicated overhaul of the corporate income tax that would have taxed imports but not exports. But retailers (who typically import many of their products) balked, and the idea never gained traction.

Trump’s solution: Forget about paying for cuts at all. When the administration rolled out its one-page tax plan last month, Mnuchin said the cuts would pay for themselves by driving faster economic growth. But essentially no economists support that analysis. And this week, Senate Majority Leader Mitch McConnell said he didn’t think that any tax deal should increase the federal deficit. If the rest of the Senate goes along with McConnell, that could make it tough to reach a deal.

The budget: Big cuts

When President Trump released his “blueprint” for the federal budget earlier this year, the Education Department looked poised to take a big hit. This week, we got a glimpse of what that might look like: According to a draft budget obtained by The Washington Post, Education Secretary Betsy DeVos is proposing hundreds of millions of dollars in cuts to programs that help public schools pay for mental-health services, Advanced Placement courses and other initiatives. Meanwhile, the administration is expected to propose big increases in spending on “school choice” programs such as charter schools and vouchers.

Don’t be surprised if there are similar leaks from other departments in the next few days as the administration’s budget process draws to a close. And even if there aren’t, we won’t have to wait long to see how Trump hopes to spend taxpayers’ money in the 2018 fiscal year, which starts in October. Mick Mulvaney, Trump’s budget director, said this week that the administration will release its full budget on Tuesday, while Trump is on his first overseas trip. Early reports suggest the budget will call for deep cuts to research spending, programs for the poor and the federal workforce.

Next week’s budget will presumably fill in the many gaps left by the outline released in March. But even with the increased level of detail, it’s unwise to take the proposals at face value. Congress, not the president, controls federal spending, and even members of Trump’s own party have expressed skepticism or even outright opposition to some of his proposals.

The budget could be significant in other ways, however. The document will include the new administration’s first estimates of future economic growth, which will offer insight into whether Trump’s budget process is grounded in realistic assumptions. Late Thursday, The Wall Street Journal reported that the administration will project the economic growth rate rising to 3 percent by 2021, well above most mainstream estimates. A rosy growth estimate would make it easier for the administration to claim that it is working toward a balanced budget, something Trump promised during last year’s campaign. (Mulvaney has said previously that the administration won’t balance the budget this year.) A budget based on unrealistic expectations, however, could be a tough sell among fiscal conservatives in Congress.