While today’s “tremendously” vague one-page summary of Trump’s tax plan had barely any detail – it did not even include the income ranges for the three personal income tax brackets – it did contain enough information for the CRFB to be able to score it, and calculate how much it would cost, or in other words assuming little or no offsetting revenues, this is how much additional debt it would add to the existing upward trajectory in US national debt.
While it is in a way amusing that after 8 years and $10 trilion in debt accumulated under the Obama administration, US sovereign debt suddenly matters, we admit that the CRFB’s findings are troubling. This is how the CRFB phrased it: “the White House released principles and a framework for tax reform today. We applaud the President’s focus on tax reform, but the plan includes far more detail on how the Administration would cut taxes than on how they would pay for those cuts. Based on what we know so far, the plan could cost $3 to $7 trillion over a decade– our base-case estimate is $5.5 trillion in revenue loss over a decade. Without adequate offsets, tax reform could drive up the federal debt, harming economic growth instead of boosting it.“
The framework proposes a number of specific changes including: consolidating and reducing individual income tax rates to 10, 25, and 35 percent; doubling the standard deduction; cutting the business tax rate to 15 percent on both corporations and pass-through businesses; repealing the Alternative Minimum Tax (AMT) and estate tax; repealing the 3.8 percent investment surtax from the Affordable Care Act (“Obamacare”); moving to a territorial tax system; and imposing a one-time tax on money held overseas.
The plan also includes some vaguer proposals, including “providing tax relief for families with child and dependent care expenses” and eliminating “targeted tax breaks that mainly benefit the wealthiest taxpayers.” Although the framework itself is vague on the latter, at their press conference Secretary of the Treasury Steven Mnuchin and National Economic Director Gary Cohn seemed to imply it meant repealing all individual deductions unrelated to savings, charitable giving, or mortgage interest (revenue would come mostly from repealing the state and local tax deduction).
While the CRFB admits that even with the detailed portions of the plan, there are not enough parameters specified to provide a certain revenue estimate of the tax plan, the agency said that “making some assumptions based on prior proposals, our best rough estimate suggests the specified parts of the plan would cost $5.5 trillion. Assuming tax break limits only apply only to higher earners, that cost could be as high as $7 trillion; assuming credits and exclusions are eliminated as well as deductions, it would cost $3 trillion.“
The conclusion: adding interest costs, a $5.5 trillion tax plan would be enough to increase debt to 111 percent of Gross Domestic Product (compared to 89 percent of GDP in CBO’s baseline) by 2027.
That would be higher than any time in U.S. history, and no achievable amount of economic growth could finance it.
Here we go back to our original cynical observation: suddenly, after years and years and trillions of new debt, the experts – especially those on the left – are suddenly so very concerned about it. That aside, at 77 percent of GDP, debt is currently higher than at any time in history outside of World War II and its aftermath. Even under current law, debt will rise to 89 percent of GDP by 2027. Based on the details of what has been put forward by the Trump Administration so far, debt could rise to 111 percent of GDP by 2027 – a new historical record. In dollar terms under this estimate, debt held by the public would total $31 trillion in 2027 and gross debt would total $36 trillion.
Of course, one look at the chart above – assuming Trump does not come up with offsetting revenue measures, which so far he has not proposed – means that it has a snowball’s chance in hell of passing Congress. As Reuters more politely puts it, “Trump’s proposal may be unpalatable to party fiscal hawks. It lacks plans for raising new revenue and could potentially add billions of dollars to the federal deficit.”
Finally, here are some analysts quoted by Reuters, on the opinion of the proposed plan.
GREG MCBRIDE, CFA, BANKRATE.COM CHIEF FINANCIAL ANALYST, WEST PALM BEACH, FLORIDA:
“In the eyes of financial markets, apparently all the concerns about North Korea, Syria, etc have been vanquished as the euphoria about tax reform has taken over. Wake me when something actually gets signed into law.”
DAVID LEFKOWITZ, SENIOR EQUITY STRATEGIST AT UBS WEALTH MANAGEMENT AMERICAS IN NEW YORK:
“A lot to digest on the tax side and to be honest we don’t have a lot of details at this point aside from just a few bullet points from the press conference. The key question really is what is doable from a budgetary and political perspective in Congress and this is going to be a bit of an uphill fight to get this plan enacted into law. But it is early innings, early days and the White House is going to have to try to convince a lot of people this is the right way to go.”
MICHAEL PURVES, CHIEF GLOBAL STRATEGIST AT WEEDEN & CO, IN NEW YORK:
“There’s no question that lower taxes means higher earnings and stronger balance sheets. From a market perspective its a positive. From an economic perspective for the country its much more complicated.
“There’s a long way to go between now and a done deal. The fact the market has gone nowhere today is telling you something.
JOE MANIMBO, SENIOR MARKET ANALYST AT WESTERN UNION BUSINESS SOLUTIONS IN WASHINGTON DC:
“The lack of specificity with regard to the tax announcement offered little for dollar bulls to get excited about. If anything, it dimmed the spotlight on Europe and it put the focus back on ‘Trumponomics’ that could ultimately benefit the dollar. I think the market still has a bad taste in its mouth for how the healthcare reform went, so there’s a degree of skepticism in how soon we could see tax relief.”