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The White House released its budget proposal for the 2018 fiscal year earlier this week, and it includes massive cuts to domestic programs and increased defense spending.
The administration touted its projection that the budget would be on a path to balance within 10 years. But that assumption relies on a few basic errors that economists say undermine the entire document.
The budget, economists say, “double counts” how proposed tax cuts would affect its bottom line.
The Trump administration has touted its tax plan as revenue-neutral because of the economic growth it says would result from more money in Americans’ pockets. Put another way, the administration said any deficit increase from lost revenue would be made up by higher GDP growth.
Trump’s budget, however, would also supposedly balance in 10 years – even though the spending in the proposal is greater than the tax receipts it assumes. To account for this, the Trump administration said the economic growth from tax cuts would make up the difference.
By that logic, the economic growth from tax cuts would mean the tax plan would both have no effect on the deficit – and make so much money that the $2 trillion difference between spending and receipts would disappear.
Confused? A wide array of economists from across the political spectrum were, too.
This mistake drew pushback from former Treasury Secretary Larry Summers and Keith Hennessey, who was the director of President George W. Bush’s National Economic Council.
“Either the $2 trillion of added cash inflows resulting from faster economic growth can pay for more government spending and reduce the need for government to borrow, or that $2 trillion can replace the cash lost to the government from cutting taxes and reduce the size of painful tax increases you need to propose,” Hennessey wrote in a blog post on Tuesday. “Arithmetic forces you to choose one goal or the other.”
Hennessey added, “You can’t have it both ways, and $2 trillion is a big hole to fill.”
Mick Mulvaney, the director of the Office of Management and Budget, said the double-counting was done “on purpose.”
“Regarding the double-counting,” Mulvaney said, “here’s one of the things I think that a lot of folks have overlooked – and we did it on purpose because it’s sort of hard to count this, and you don’t want to make too many assumptions – you have to make assumptions about a budget. You’re talking about a document that will look 10 years into the future. So it’s natural for administrations from either party to make some assumptions.”
The estate tax
Another discrepancy is in the Trump administration’s call for an elimination of the estate tax.
Nobel Memorial Prize laureates and the New York Times columnist Paul Krugman have noted that Trump’s budget proposal and tax plan both call for the elimination of the estate tax, which is levied on the estates of people with more than $5.45 million in assets (for the 2016 tax year).
The budget proposal, however, contains an assumption that receipts from the estate and gift taxes will increase to $43 billion in 2027 from $21 billion now. About $2 billion of the $20 billion collected in 2015 was from gift taxes – the rest was from the estate tax.
Mulvaney said the tax plan wasn’t fully incorporated in the budget proposal because it was a guideline of principles, but one of the most explicit parts of that plan was repealing the estate tax.
“It’s the least honest and competent budget that’s been put out in 40 years,” Summers said.