Monday, October 3, 2016

Trump’s BFF: Rosy Scenario

By Robert J. Samuelson
The Washington Post
October 3, 2016

Rosy Scenario is alive and well. There is a long and dubious tradition among politicians of projecting high — usually unrealistic — rates of economic growth as a way of avoiding unpopular political choices. We can do everything, because rapid growth and torrents of tax revenue will pay the bills. That’s Rosy’s message, and Donald Trump has eagerly embraced it.

What Trump proposes is a huge vote-buying machine — a massive tax cut, financed mostly with borrowed money — masquerading as an economic policy. Almost everyone would get something, although the rich would get the most (because they pay most of the taxes). This is Trump’s other tax problem, alongside the weekend revelation that he may have paid no federal income taxes for years.

Here are the basics. The standard deduction for married couples would rise from today’s $12,600 to $30,000; any couple with taxable income below that level wouldn’t pay a cent (generally, the amounts for singles are half those for couples). On the first $75,000 of taxable income — again for couples — the rate is 12 percent. The other two rates are 25 percent (on taxable income up to $225,000) and 33 percent (on income above $225,000). The top rate today is 43.4 percent.

Businesses would also get big breaks. The top rate on corporate income would drop to 15 percent from today’s 35 percent.

The price tag for this extravaganza? The nonpartisan Tax Foundation puts it between $4.4 trillion and $5.9 trillion over a decade (2016 to 2025), depending on how the plan is implemented. It’s a lot.

Not to worry, say Trump advisers. Last week, Peter Navarro, an economist at the University of California at Irvine, and Wilbur Ross, a well-known investor, released a 31-page study full of fancy calculations purporting to show how Trump’s plan would ignite rapid growth while barely adding to the $14 trillion federal debt held by the public.

First, they say, you have to adjust for the “dynamic” effects of lower tax rates on both labor income (wages, salaries) and capital income (profits, interest payments). Low tax rates raise economic returns. People work more; companies invest more. This speeds up economic growth, though how much is debated by economists. The Tax Foundation says these adjustments could reduce the 10-year cost of Trump’s tax plan to between $2.6 trillion and $3.9 trillion. Still a lot.

Next, say Navarro and Ross, you have to count the higher taxes from Trump’s trade, regulatory and energy policies. These are huge. Through tougher trade policies, Trump would quickly eliminate the chronic U.S. trade deficit, $500 billion in 2015. American jobs and profits increase. So does tax revenue, to the tune of $1.7 trillion over a decade.

The same logic applies, say Navarro and Ross, to government regulation and energy policy. Overregulation stifles hiring and investment, they say. They figure that Trump cuts regulatory costs by 10 percent, resulting (again) in higher employment and profits. The tax windfall over a decade is nearly $500 billion. Streamlining energy regulations would, by the same logic, increase taxes by almost $150 billion over a decade.

Do the arithmetic. According to Navarro and Ross, the higher tax revenue from Trump’s policies totals about $2.4 trillion — roughly equal to the lower estimate of lost revenue in the “dynamic” simulation.

Convinced? You shouldn’t be. You will notice that all these changes are simply assumed; they’re made-up and self-serving. They assume that Trump’s tough trade tactics immediately scare other countries into submission, rather than (as many trade experts expect) triggering retaliation that would reduce many countries’ income and taxes. Similarly, the regulatory changes are assumed to occur smoothly, dispensing with political and legal challenges or the sheer complexity of many rules.

Even the tax gains from adopting “dynamic” economic assumptions are uncertain, as the Tax Foundation itself acknowledges. “It is very tricky to isolate the effects of tax policy” on the economy, it says. The effects could be swamped by other factors: the state of the business cycle, other government policies, broad social and economic trends.

What’s also forgotten is that both Trump’s and Hillary Clinton’s programs accept the deficits of existing policies.That’s about $8 trillion over a decade. Clinton’s proposals would also add to these, but much less than Trump’s. The nonpartisan Committee for a Responsible Federal Budget estimates that Clinton’s policies would increase the debt by about $200 billion above existing deficits for the decade.

None of this means that U.S. trade, regulatory and energy policies aren’t essential subjects for debate. Constructive changes might improve the budget and economic outlooks. But the notion that Trump can wave a magic wand over these matters and — presto! — produce vast revenue to finance politically popular tax cuts is either wishful thinking or deliberate deception. It’s make-believe: a ploy to procrastinate on hard political choices. Rosy Scenario would be proud.


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