The massive tax cuts sought by the Trump administration would lose trillions in revenue, leave some taxpayers with a bigger tax bill, and ultimately do more harm than good to the overall economy, according to a report by the Urban-Brookings Tax Policy Center (TPC).
The July 12 analysis, based on a hypothetical tax plan consistent with the Trump administration’s outlined proposals, examined a scenario that paired proposed tax cuts with possible revenue raisers. It found that the administration’s tax reforms could cost $3.48 trillion over a decade on a static basis and yield only $109 billion in additional revenue over 10 years after accounting for macroeconomic feedback, for a dynamic 10-year revenue loss estimate of $3.36 trillion.
The TPC estimates paint an even gloomier picture in the second decade of President Trump's tax cuts, projecting that the plan would lose an additional $5.68 trillion between 2028 and 2037 on a conventional scoring basis, and would actually lose even more revenue after applying the organization’s dynamic scoring models to the estimate. With macroeconomic feedback included, the second decade would lose an additional $197 billion, for a total cost of $5.88 trillion.
That analysis stands in stark contrast to the White House’s internal projections. Trump administration officials have repeatedly emphasized that their tax cuts and reforms will drive a dramatic boost in the nation’s economic growth, with Treasury Secretary Steven Mnuchin saying as recently as June 9 that they expect to get back $2 trillion in revenue from increased growth through tax reform alone.
The muted dynamic effect can be largely attributed to the “piling on of debt” that would cause an across-the-board spike in interest rates, which in turn “crowds out productive investment in the U.S.,” TPC Director Mark Mazur told reporters on a conference call. He added that although there are significant economic boosts from the tax cuts in the early years, that growth effect is rapidly undermined by the increased cost of federal borrowing to finance the tax cuts.
Benjamin Page, a senior fellow with the center, added that because those deficits increase over time, the crowd-out effect becomes more pronounced in later years. “That just grinds down the [dynamic] effect on the economy,” Page said.
And contrary to the White House’s target of boosting national economic growth to 3 percent of GDP or higher, the report found that by the end of the initial 10-year budget window, the economy would actually be smaller than if the tax cuts had not been enacted.
TPC Co-director Eric Toder acknowledged that his organization estimated only the effects of the administration’s potential tax policies, not the sum total of its economic agenda. The White House could respond that there are other changes outside the tax system, like regulatory reform or spending reform, that factor into its economic growth projections, but which are outside the scope of the TPC's analysis, he said.
The report also emphasizes that while the analysis draws on the one-page tax reform outline the White House released in late April and the proposals offered during the campaign and since then, there are “too many unknowns” about the policy specifics to definitively calculate the cost of Trump’s tax reform plans. Instead, the analysis “provides perspective on the revenue and distributional effects of a plan containing the tax ideas raised by the administration, as well as some of the trade-offs that the administration is grappling with while attempting to craft a fleshed-out plan.”
The White House did not respond to a request for comment by press time.
Tax Cut for All?
Among the trade-offs that the administration will have to wrestle with is whether its plan meets one of its key campaign promises — a middle-income tax cut — and the TPC report indicates it might fall short on that goal.
After estimating the changes from a Trump tax cut paired with revenue-raising provisions, the report found that 19.1 percent of households would face an average tax increase of $1,630, with the bulk of those concentrated among the middle and upper quintiles. Only the extreme ends of the spectrum — the lower quintile and the top 1 percent — had a relatively small share of households facing a tax increase, at 6.8 percent and 9.9 percent, respectively. The major source of those tax increases comes from repealing personal exemptions, head of household filing status, and almost all itemized deductions.
The analysis also suggests that the administration may have difficulty reconciling its tax reform plans with the so-called Mnuchin rule — that there would be no absolute tax cut for wealthy taxpayers. According to the report, 49.4 percent of the administration’s tax cuts would go to the top 1 percent of earners, providing an average annual tax cut of $174,540.
“If you were serious about the Mnuchin rule, you wouldn’t repeal the estate tax and the net investment income tax,” Mazur said. The latter is subject to ongoing Senate negotiations on Affordable Care Act repeal, but the TPC analysis assumes the provision will be repealed as part of tax reform, as specified in Trump's tax reform outline.
Mnuchin has said the tax rate reductions for the wealthy could be offset by eliminating special interest tax breaks, but the analysis shows that even if major tax breaks like the state and local tax deduction are taken away, that’s only a partial offset, according to Mazur. Toder added that cutting the business income tax rate for both corporations and passthroughs to 15 percent has a particularly large benefit for high-income individuals.
The distributions of the tax cuts and the tax increases “underline the challenges of doing tax reform. . . . You need revenue raisers, often broad-base revenue raisers, that are politically hard to do,” Mazur said.
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