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The dumb accounting error at the heart of Trump's budget

Vox.com logo Vox.com 5/23/2017 Matthew Yglesias
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“The same money cannot be used twice” — unless it can.

Not only does the Trump administration’s budget proposal rely on economic growth assumptions that are wildly more optimistic than those produced by any private sector forecaster, it turns out that embedded within those assumptions is a completely ridiculous accounting error.

Here’s how it works. The budget is counting on economic growth — and a lot of it — to overcome what otherwise would be a projected $1.3 trillion deficit in 2027, and instead achieve balance. A big part of that growth comes from a deficit-neutral tax proposal whose details aren’t spelled out in the budget document.

That’s a little bit odd, because the administration has already sketched out the broad contours of its tax policy. That proposal would, on a conventional account, lead to a massive increase in the deficit. The administration says that’s okay, though, because the extra growth unleashed by the tax cuts will offset the loss in revenue.

See the problem? Trump is not only counting on supply-side magic growth to make his numbers work, he’s using the same magic bean twice. First the tax cuts provide enough extra growth to make the tax reform deficit neutral. Then the deficit neutral tax reform provides enough extra growth to make the overall budget balanced. It’s ridiculous. Larry Summers, the former Treasury secretary and National Economic Council director, calls it “a logical error of the kind that would justify failing a student in an introductory economics course.”

More to the point, it’s a sign that the Trump White House simply isn’t set up to govern the country at all. It’s normal for Congress to reject large aspects of a president’s budget proposal, but normally you would expect a same-party Congress to at least seriously consider what the president is requesting. But Trump isn’t even remotely in the neighborhood of a blueprint that Congress could use even if they were so inclined. He’s taken the vast technical and analytical resources of the executive branch and effectively thrown them all in the trash can.

The math, such as it is

Delving into the details of the Trump administration’s budget math is challenging because the administration has simply declined to provide details on key questions. Nonpartisan analysts are generally fairly skeptical of the ability of tax reform to supercharge growth, with the Joint Committee on Taxation generally believing you could increase GDP by 1 to 3 percent over a 10-year period through various tax reforms.

But to be generous to Trump, we might instead consider the tax and growth model from the Tax Foundation, a center-right think tank that is very enthusiastic about the supply-side benefits of tax cuts.

The latest iteration of Trump’s tax plan lacks sufficient detail to be scored, but they did look at his more detailed campaign proposal, which is broadly similar. They are much more enthusiastic than the JCT about this tax plan, seeing it as likely to boost GDP by somewhere around 8.2 percent.

Nonetheless, they believe the campaign plan would add $4 trillion to the deficit rather than be revenue neutral. Kyle Pomerleau, the TPC’s federal tax policy director, believes the new plan might add something more like $6 trillion to the deficit.

Then we get to the double-counting. Trump's budget also says the growth-boosting impact of his policies will generate an extra $2.1 trillion in federal revenue, even though some of that growth is supposed to come from tax cuts he already banked on to try to make his tax reform deficit neutral. The White House doesn’t say exactly how much of that extra growth was supposed to come from tax policy as opposed to other things, but taxes are clearly a centerpiece of Trump’s growth strategy, so let’s call it half and add $1.05 trillion to the $4 to 6 trillion hole the Tax Foundation found.

Now rather than a balanced budget you have a $5 to 7 trillion deficit — and that’s under very aggressive supply-side assumptions.

How did this happen?

Office of Management and Budget Director Mick Mulvaney offered a baffling defense of this accounting strategy at his Monday briefing with reporters.

He explained that the budget assumes tax reform will be deficit neutral because “it was in all honesty the most efficient way to look at it.” How so? Well, he explained, “if we said it’s going to add to the deficit then we have to go into more detail than what’s in the summary right now, [and] if we say it’s going to reduce the deficit, we have to go into more detail than what’s in it right now. And we simply are not in a position to do that.”

In other words, he assumed the tax plan would be deficit neutral because that made his life easier — not because there is any reason to believe it. And because no analytics went into justifying that assumption, officials didn’t notice that they were double-counting the growth.

As Maya MacGuineas of the Committee for a Responsible Federal Budget observed in her statement on the proposal “the same money cannot be used twice.”

The underlying issue here, beyond Trump’s habit of overpromising and general disregard for the truth, is the slapdash process through which his tax plan was released. According to Politico’s Shane Goldmacher, Trump’s economic team was busy working on the difficult problem of designing a revenue-neutral tax plan when someone showed him a New York Times op-ed by Steve Forbes, Larry Kudlow, Arthur Laffer, and Stephen Moore that argued Trump should forget about deficit-neutrality and endorse a big deficit-increasing tax cut like he did on the campaign trail.

“Trump summoned staff to talk about” the op-ed, according to Goldmacher. “His message: Make this the tax plan.”

Then two days later, on a Friday, Trump told the press that his tax plan would be ready by next week even though his staff didn’t have a plan. Consequently, they rushed out a blueprint based on his campaign plan and didn’t worry too much about the fact that it isn’t remotely deficit neutral. The budget team, meanwhile, just plowed ahead as if none of that had happened and Trump was still working on a deficit neutral plan.

The White House isn’t ready to govern

In a concrete sense, this doesn’t really matter. Presidential budget proposals are aspirational documents, not things that become law, and the congressional budget process is governed by the Congressional Budget Office’s scores anyway, not by whatever OMB cooks up.

But budgets are important as statements of values. One clear headline value of the Trump budget is an overwhelming preference for cutting taxes on high-income families over providing food, medical care, housing assistance, and other support to low-income families.

The growth accounting mess shows a parallel value — or, rather, lack of value — placed on the idea of governing with integrity. The Obama administration did not expect congressional Republicans to adopt his budget proposals and, of course, they didn’t. But they could have done so if they wanted to. By deploying the resources of the executive branch to lay out workable blueprints for possible federal budgets, Obama helped lay the groundwork for hypothetical future Democratic Congresses to enact things his party cared about.

Trump’s White House is just going through the motions. They’re supposed to release a budget proposal, so they released a budget proposal. Whether or not it makes any sense is a matter of total indifference to them. But they’ve now kicked the can to congressional Republicans in an awkward way, since if Congress wants to enact a budget, they need to enact a real one with details filled in. Meaning they can’t possibly match the unrealistic aspirations Trump has laid out for them.

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