By David Lawder
WASHINGTON (Reuters) – U.S. President Donald Trump’s tax-cut plan will generate growth, but not nearly enough to replace trillions of dollars in lost revenues, while rising deficits could even take back some of the economic gains, fiscal experts said on Wednesday.
Core principles of the plan, unveiled on Wednesday, rely heavily on so-called “dynamic scoring,” a budget analysis method that assumes tax cuts will boost economic activity, thus generating more revenues.
Such assumptions have been at the heart of Republican tax orthodoxy since Ronald Reagan used them to justify massive tax cuts in 1981 that were derided at the time by critics as “voodoo economics.”
On Wednesday, Treasury Secretary Steven Mnuchin said Trump’s plan would “pay for itself with growth” and closing of some deductions and credits.
From the details released so far, Maya MacGuineas, who heads the Committee for a Responsible Federal Budget (CRFB), said the plan could add $3 trillion to more than $5 trillion to the federal deficit over five years.
“No credible dynamic score is going to show that this bill is paid for,” MacGuineas said. “The growth effects, which are real and important, add decimals of percentage points to growth, not full percentage points.”
Her budget watchdog group estimates that to pay for the plan, U.S. growth would need to be sustained at 4.5 percent annually, a level not seen on a sustained basis since the late 1960s and early 1970s.
Mnuchin has said that he expects the plan to boost sustained U.S. growth above 3 percent, but CRFB estimates that even this level would require massive increases in productivity and that a rapidly retiring baby-boom generation is working against high growth rates.
Doug Elmendorf, former director of the Congressional Budget Office, one of the agencies that provides cost estimates for legislation, said he sees little chance of Congress finding “politically acceptable” offsets to pay for the plan, and the rise in borrowing could work against Trump’s goals.
“The resulting increase of the deficit will have a dampening effect on the economic activity that will offset at least part of the stimulative effects of lower tax rates,” said Elemendorf, now dean of Harvard University’s John F. Kennedy School of Government.
The higher federal debt load will “crowd out” capital for private use, dampening economic activity in the long run, Elmendorf said.
Republicans in Congress are hoping to use budget procedural rules that allow a 51-vote threshold in the Senate to pass tax reform, which would limit the cuts to 10 years.
But if the plan creates deficits in the years beyond the first decade, it could also run afoul of another procedural rule that could require 60 votes in the Senate.
Tax cuts that expire in a decade could cause another U.S. fiscal crisis like the one in 2012, when tax cuts passed under George W. Bush expired.
“What the Trump Administration has proposed is not permanent tax reform, but a ten-year tax cut and the creation of the most phenomenal fiscal cliff ever in 2028,” Chris Krueger, a political analyst at Cowen and Co in Washington, said in a note to clients.
(Reporting by David Lawder; Editing by David Chance and Jonathan Oatis)