“I am the king of debt,” Donald Trump famously boasted during last year’s campaign. On Wednesday, the president is going to set about proving it—but perhaps not in the way he originally meant.
All indications are that the tax plan the White House is slated to unveil will include what Trump has described as a “massive” cut in the rate that corporations and many small businesses pay to the government. But it will omit the more politically painful choices that Republicans would need to make to offset the corresponding loss of revenue, such as House Speaker Paul Ryan’s proposed tax on imports or the elimination of popular deductions for charitable giving and homeowners. The result is a tax plan that, like the ones Trump offered as a candidate, could add trillions of dollars to the national debt. You can call them tax cuts, but they aren’t tax reform.
In pursuing the cuts-only approach favored by supply-side economic conservatives, Trump is forgoing—at least for the moment—the more ambitious overhaul of both the corporate and individual tax code that Republicans like Ryan have been pursuing for years. That would take months, if not years, more to complete, and the president plainly does not want to wait. He caught both Republican lawmakers and, reportedly, his own staff off-guard by announcing that the White House would unveil some sort of tax plan this week, ahead of the 100-day marker of his presidency. What Trump will actually release might be little more than a sheet of paper with some broad principles, much less a detailed legislative proposal. It’s the Cliffs Notes version of a tax plan, which will make for a clean headline and is simpler to explain to voters than a proposal with the inherent winners and losers that a broader reform package would create.
Choosing the simpler path is a familiar move for Trump, and so is picking a policy that places deficit reduction far behind his other priorities. While the president has at times talked about tackling—and even pledged to eliminate—the nation’s nearly $20 trillion debt, he has campaigned and governed as a bigger-government conservative. He’s called for up to $1 trillion in new infrastructure spending, proposed a $30 billion increase in the military budget, and wants to build a wall along the southern border that could cost billions more. Trump’s initial budget proposal called for steep cuts to domestic programs to pay for some of the increased spending elsewhere, but it notably omitted any effort at restraining the entitlement programs eyed by Republicans as the main drivers of long-term deficits. When Trump called himself “the king of debt” in a CBS interview last year, he was referring to how he used strategic borrowing in the operation of his businesses. But he’s resorting to a similar approach to run the government as well.
“The Trump campaign proposed two revenue-decreasing tax plans during the campaign. It should not be so surprising if they also propose a net tax cut once in the White House,” said Scott Greenberg, an analyst with the Tax Foundation, which projected that the Trump campaign’s final tax plan would have increased deficits by as much as $5.9 trillion.
The president’s outline is likely to win some fans among Republicans in Congress, but it will cause conflict with others. In the House, GOP leaders have been writing a tax bill that would not add to the deficit under the formula the party uses to estimate its impact on the budget (calculations that Democrats vigorously dispute). That’s a major reason why Ryan has been pushing for a “border adjustment tax” designed to offset an estimated $1 trillion in rate reductions over a decade.
But with that plan facing bipartisan opposition and with the GOP health-care bill stalled, conservative economists have been pushing the party to advance a tax proposal that would be politically easier and, in their view, more quickly stimulate economic growth. They’re advancing the theory popularized under former President Ronald Reagan that lower taxes will generate more economic activity and thereby lead to more revenue for the government from a broader base of taxpayers. Adopting that view, the White House has decided to go big on rate cuts. According to The Wall Street Journal, the proposal will call for a 15 percent tax rate both for corporations—down from 35 percent—and for smaller businesses in which the owners currently pay the highest individual rate of 39.6 percent. “The tax plan will pay for itself with economic growth,” Treasury Secretary Steven Mnuchin told reporters on Monday.
Yet even the most ardent supply-side advocates don’t believe a cut that deep will refill the government’s coffers through economic growth alone. Their argument is that the deficit concerns are less important than the need to jolt the economy, which has been growing at a modest rate of around 2 percent or less for the last several years. “I’m not saying that cutting the corporate rate from 35 [percent] to 15 [percent] is going to pay for itself,” Stephen Moore, a conservative economist who advised Trump during the campaign, told me on Tuesday. “It may. It may not. I’m just saying that if we can get more growth from it, do it. And if that means you’re going to have a higher deficit, so what? It’s worth it to get more growth.”
After years of belt-tightening that congressional Republicans forced on former President Barack Obama, the assumption that deficits are automatically bad has taken a hit with politicians in both parties. Progressives have called for a new round of government spending to boost jobs and reduce income inequality, while conservatives argue for business-oriented tax cuts at the expense of the federal balance sheet. But the loosening fiscal policy of the last couple of years has alarmed those who believe the debt remains a long-term threat to economic stability. “If this tax reform is not paid for, it is backwards and disappointing. Tax reform is supposed to be done to create economic growth, not paid for by economic growth,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. She argued that the negative impact of a rising national debt, including the risk of higher interest rates, would undercut the very economic growth Republicans claim to want. “This is maybe politically expedient, but it will be economically damaging and a real lost opportunity for the growth agenda we need to be pursuing,” she told me.
Moore, along with fellow supply-siders Steve Forbes, Larry Kudlow, and Art Laffer, published an op-ed in The New York Times last week urging the president to “keep it simple” and prioritize a tax cut over a broader overhaul. Trump appears to be taking their advice. The latest reports suggest that in addition to the overall rate cuts, the White House will seek to offer corporations a discount rate to “repatriate” profits held off-shore so it can use the revenue for infrastructure—a plan designed to attract Democratic support. The proposal could also contain a childcare tax credit sought by Ivanka Trump.
But the plan’s overall price tag could be a hinderance both politically and procedurally. Democrats are unlikely to back unpaid-for tax cuts for corporations and the wealthy no matter how much money for infrastructure is included. That will force Republicans to try to pass a bill through the budget reconciliation process—as they tried to do with health care—that would circumvent a filibuster in the Senate and require only a simple-majority vote. But the budget rules forbid legislation advanced through reconciliation to add to the debt over the long term, so Republicans might have to make their tax cuts temporary and expire after 10 years, which is what they did under former President George W. Bush 15 years ago.
Even with that fine print, Trump’s pain-free plan likely would be easier to pass than a far more complicated overhaul that raises taxes on some industries and cuts them for others. As they have before, Republicans will argue that they’re returning money to the people in service of a brighter economy. All they have to stomach is higher short-term deficits, and for the president, that’s no obstacle at all.
