The Trump administration has proposed a massive $6 trillion tax cut, mostly for the wealthy. How does Trump’s budget, released today, account for this massive amount of lost revenue? It doesn’t. In fact, it assumes that revenue would increase by $2 trillion over ten years.
This is detailed in table S-2, which states that “economic feedback” will reduce the deficit by $2,062,000,000,000 over 10 years.
The “economic feedback” refers to the growth that the Trump administration assumes will come as a result of its tax cut. It is an assumption that far exceeds the beliefs of even the most enthusiastic supply-side economists.
The theory in play is that, by reducing taxes, you incentivize economic activity by allowing corporations and people to keep more of what they earn. This is true to some degree. Conservative economists tend to believe this incentive will have big impacts while liberal economists tend to believe that the incentives are negligible.
But how big is big? Take N. Gregory Mankiw, the economist behind George W. Bush’s huge tax cuts for the rich. He believes “about one-third of the cost of tax cuts is recouped via faster economic growth.” History bears this out. Edward Kleinbard, a tax expert at the University of Southern California, notes “There is no time in modern history where tax cuts could be said to pay for themselves.”
Evaluating the question of whether tax cuts can fully pay for themselves, Politifact “searched high and low and found no economic experts who could point us to evidence of tax cuts fully paying for themselves.”
If you were to take the optimistic, supply-side assumption that one-third of the cost of tax cuts is recouped due to economic growth, Trump’s tax cuts still blow a $4 trillion hole in the deficit. Trump’s budget magically erases that $4 trillion.
But it doesn’t stop there! Trump assumes that, in addition to paying for itself, his tax cut will create an additional bonus of $2 trillion. In other words, he’s assuming his tax cut more pays for itself .
Another way of putting this: while supply-side economists assume tax cuts will result in growth that will recoup 30% of lost revenue, Trump assumes his tax cut will recoup 133% of lost revenue.
That’s a $6 trillion difference between what economists think is even possible and what the Trump budget assumes will happen.