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Economists Fear Trump’s Tax Plan Only Heightens a ‘Mountain of Debt’ - The New York Times

During his campaign, Donald J. Trump embraced the cause of fiscal responsibility and accused President Barack Obama of shackling the country with a “mountain of debt.”

Mr. Obama “doubled our national debt. Doubled it,” Mr. Trump claimed in a speech in Virginia Beach.

Then on Wednesday, Mr. Trump unveiled the outlines of his much-anticipated tax overhaul, calling for steep tax cuts with only modest offsetting revenue increases. Economists I spoke to this week estimate it would add trillions to the national debt over the next decade.

“We’ve only done the rough numbers, but this looks like a tax cut of a magnitude of about $5 trillion,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan advocacy organization for fiscal responsibility. “That is simply unimaginable given our fiscal situation and the size of the deficit, which is already the worst since World War II.”

The sense of incredulity was widely shared.

“Paul Ryan and Kevin Brady must be beside themselves in private,” said Leonard E. Burman, director of the Urban-Brookings Tax Policy Center and a professor at the Maxwell School of Syracuse University, referring to the House speaker and the House Ways and Means Committee chairman. “They put in years of work on a tax reform plan that at least tried to be revenue-neutral,” meaning tax cuts would be offset by closing loopholes, “and wouldn’t explode the deficit.”

Or as Steven M. Rosenthal, a business tax expert and senior fellow at the Urban-Brookings Tax Policy Center, put it: “Mr. Trump’s plan basically is tax cuts for everyone. Real reform, with revenue neutrality, is difficult. There are winners and losers, but Trump apparently just wants winners.”

Tax cuts, as opposed to tax reform, are easy, Ms. MacGuineas agreed: “Who doesn’t love a tax cut, especially if no one has to pay for it? This is a free-lunch mentality.”

That Mr. Trump would embrace such a cut-now, pay-later approach probably shouldn’t be too much of a surprise, considering the Trump Organization’s reliance on borrowed money. “I’m the king of debt,” Mr. Trump said last year on CNN. “I love debt.”

Just how much Mr. Trump’s plan would cost the government is hard to determine, given the sketchy details. But the conservative-leaning Tax Foundation estimates that two prospective elements — reducing individual rates to three brackets of 35, 25 and 10 percent, and cutting the tax rate for corporations and pass-through entities (businesses that pay taxes at individual rates) to 15 percent — would cost the Treasury $4 trillion to $6 trillion over 10 years, said Alan Cole, an economist at the foundation.

The Urban-Brookings Tax Center estimated the cost of the cuts Mr. Trump proposed during the campaign at $6.2 trillion, assuming no additional growth, and just under $6 trillion when growth is factored in.

Mr. Trump also wants to eliminate the estate tax and the alternative minimum tax, each of which would cost the Treasury hundreds of millions in revenue.

The administration’s proposal was silent on some critical aspects of any tax plan, such as the treatment of capital expenditures for business. Mr. Trump has said he strongly supports immediate expensing of capital expenditures, which many economists agree would encourage growth. The Tax Foundation estimates that such a change from current depreciation schedules would cost the Treasury $2.2 trillion over 10 years.

That would raise the 10-year revenue loss to well over $8 trillion.

Mr. Trump’s proposal did nod in the direction of raising revenue by calling for elimination of all deductions, save those for mortgage interest, charitable contributions and retirement savings. The major deduction not mentioned — and evidently jettisoned — is the one for state and local taxes. (And it’s probably no coincidence that the states that would be hit hardest, like New York and California, overwhelmingly supported Hillary Clinton.)

Mr. Cole said eliminating the deduction for state and local taxes would add about $2 trillion of revenue over 10 years.

But the Trump plan didn’t address other possible sources of revenue, such as eliminating the interest deduction for businesses or imposing a border tax. Both are key elements of the Republican House plan, but have drawn fierce opposition from the powerful real estate and retail lobbies.

The Treasury secretary, Steven T. Mnuchin, suggested that the plan would “pay for itself” by bolstering economic growth and tax receipts. But no economist I spoke to this week — Republican or Democrat — said growth could compensate for an increase in the deficit of anywhere near the magnitude of $4 trillion to $6 trillion.

“I want a plan that’s focused on growth as much as anyone,” said Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group. “But these tax cuts are not going to pay for themselves. If you believe that, you’re kidding yourself.”

While economists debate the impact of vast additional government borrowing on debt markets, most argue it would drive up interest rates, curbing the very growth the cuts were intended to foster. “Borrowing trillions of dollars eventually shows up in financial markets,” Mr. Burman said. “It will almost certainly push up interest rates.”

And the effect would come at a time when the Federal Reserve is already raising interest rates, even without the impact of new federal borrowing.

“We’re very vulnerable to higher rates,” Ms. MacGuineas said. “Every 1 percent increase in interest rates adds $160 billion a year to our existing interest payments. Interest is already the fastest-growing portion of thefederal budget.”

She, too, argued that a big increase in federal borrowing would push up interest rates, undermining growth “or even causing negative growth.”

The Urban-Brookings Tax Policy Center estimated that when additional interest payments were included, Mr. Trump’s campaign tax proposals would add $7.2 trillion to the national debt by 2026 and $20.9 trillion by 2036.

“The losers are future generations,” said Mr. Rosenthal — as Republicans have long argued.

Given the huge impact on the deficit, no one I spoke to expects Mr. Trump’s plan to be enacted without significant modifications. “I don’t think a tax cut of anywhere near this size can make it through Congress,” Ms. MacGuineas said. “There are varying degrees of commitment to getting our fiscal affairs under control among members of Congress, and there are some Republicans who only use the argument against Democrats. But there are others who are very serious about it.”

Mr. Holtz-Eakin agreed. “There are many Republicans who genuinely care about deficits,” he said. “They recognize that you can’t create permanent tax reform if you’re blowing up the deficit. “

He added: “I think this is an opening salvo. With this president, everything is a negotiation, and this is his opening bid.”

Even that prospect is worrisome, Ms. MacGuineas said. “These numbers are so huge, they almost lose meaning,” she said. “You start negotiating about adding $5 trillion to the deficit and $1 trillion starts to sound reasonable. But that shouldn’t even be on the table without a plan to get the deficit under control.”