Donald Trump’s tax plan, if without border-adjusted tax, may be temporary

US President Donald Trump's administration is more concerned with economic growth and job creation than revenue neutrality

Lynnley Browning, Rich Miller
First Published22 Apr 2017
Donald Trump said his tax plan will result in ‘massive’ tax cuts for both individuals and businesses. Photo: Reuters
Donald Trump said his tax plan will result in ‘massive’ tax cuts for both individuals and businesses. Photo: Reuters

New York/Washington: US President Donald Trump has promised a massive tax cut for Americans. He may be able to achieve it, but only temporarily.

The news that a senior administration official says Trump is not likely to include a border-adjusted tax in the plan he says he will release is the latest indication that his proposed tax measures won’t be permanent. That is because the border-adjusted tax, or BAT, that house speaker Paul Ryan has proposed would generate more than $1 trillion in revenue over a decade, helping to pay for individual and corporate rate cuts. Without that revenue, or something in its place, it may be difficult for the plan to achieve revenue neutrality.

“BAT is a big number, so it makes you wonder how they get to revenue neutrality without it,” said economist Douglas Holtz-Eakin, the president of the conservative advocacy group American Action Forum in Washington and a supporter of the border-adjusted tax. “On the campaign, they didn’t mention revenue neutrality, so maybe they don’t care.”

Senior administration officials including treasury secretary Steven Mnuchin and Gary Cohn signalled at an Institute of International Finance conference on Thursday that the administration is more concerned with economic growth and job creation than revenue neutrality. White House budget director Mick Mulvaney echoed that point on Friday.

“Deficits are not driving the discussion,” Mulvaney said. “Deficits are certainly part of the discussion. But we’re not starting off saying, ‘how do we do something that’s deficit-neutral?’ We’re starting off saying, ‘how do we get economic growth?’”

Revenue Neutrality

Revenue neutrality is important, because the GOP controls just 52 of the Senate’s 100 seats, and normal Senate rules impose a 60-vote threshold for legislation to escape potential filibusters from opponents. Senate republicans could use a process known as budget reconciliation, which would allow for passing a tax bill with a simple majority. But under that process, any legislation that added to the deficit would have to be set to expire after 10 years.

Ryan’s border-adjusted tax proposal — which would replace the 35% corporate income tax with a 20% tax on US companies’ domestic sales and imports — would have provided some cushion in terms of revenue. But the concept has not gained much support among republicans in the house or Senate — and retailers, carmakers and oil refiners that rely on imported goods have said the tax would raise prices on consumer goods. If Trump does not support the measure, its chances of success will narrow significantly — as does the chance of lasting tax cuts.

A corporate tax cut that is not revenue neutral could expire after just two years under reconciliation rules, George Callas, Ryan’s chief tax counsel, said at the IIF conference.

‘Massive’ Cuts

Reports said on Friday that Trump said his plan will result in “massive” tax cuts for both individuals and businesses. The cuts will be “bigger I believe than any tax cut ever,” he said.

Mnuchin said on Thursday that the tax cuts would be fully paid for. But here’s the catch: most of that funding would come from the Trump administration’s anticipated rise in economic growth — thanks to so-called dynamic budget scoring — and not from such revenue-raising changes to the tax code as the elimination of deductions.

“Some of the lowering in rates is going to be offset by less deductions and simpler taxes,” Mnuchin said. “But the majority of it will be made up” by dynamic scoring.

Under dynamic scoring, a tax plan’s revenue effects are considered in the context of the plan’s impact on economic growth and consumer well-being. The process can be controversial — economists disagree on the best ways to predict such effects — but Mnuchin and Cohn have both emphasised the use of the technique.

The debate over dynamic scoring harks back to 1980, when George H.W. Bush accused Ronald Reagan of practising “voodoo economics” in contending that his proposed tax cuts would pay for themselves as the two men were contending for the Republican Party’s presidential nomination. While economists generally don’t believe that tax cuts are self-financing, there is growing agreement that they can lead to faster growth and with it additional revenues. The question though is how big that effect would be.

The difference in government revenues could be as much as $2 trillion over a 10-year period depending on how large an impact the tax-cut package has on the economy, Mnuchin said.

50 Cents Payback

Donald Marron, who served on former president George W. Bush’s council of economic advisers in 2008 and 2009, said the administration’s seeming estimate of the favourable feedback effects from lower taxes was “surprisingly large,” though he cautioned he had not seen the details of the plan.

Holtz-Eakin, who also served in the Bush administration, was sceptical as well. He said he worries that the administration’s projections of the tax cuts’ economic benefits are far larger than would be reasonable to assume.

“If you get 25 to 30 cents on the dollar, it would be counted as a quite successful tax reform plan,” Holtz-Eakin said. In contrast, Mnuchin’s comments suggest the administration is looking for a 50 cents-plus payback.

Other Hurdles

Aside from revenue neutrality, the White House is facing other hurdles in seeking a tax overhaul. The administration still has to get the tax-writing committees in the house and Senate on board with whatever it proposes. Additionally, legislation to repeal and replace the Affordable Care Act — which includes almost $1 trillion in potential tax cuts of its own — remains an uncertain prospect at best.

The Senate finance committee was unaware of what the White House tax plan would entail and has not seen a rough draft, a person familiar with the matter said on Friday. The committee has been having regular discussions, characterised as “educational”, with treasury and White House officials on a tax overhaul, but was surprised by Trump’s statement that a tax plan would be coming on Wednesday, said the person, who asked not to be identified because deliberations are private.

And if Trump backs away from the controversial border-adjusted tax proposal, he risks damaging relations with Ryan, who has staked considerable political capital on the measure. Beyond that, if his plan truly does not pay for itself, Trump may find it hard to find broad support in Congress.

“A plan that has no offsets is not a thing,” Callas said at the IIF conference on Thursday. “It can’t begin to move through Congress. Members wouldn’t vote for it.”

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HomenewsworldDonald Trump’s tax plan, if without border-adjusted tax, may be temporary

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