The true tax gap: How about $12 trillion!
WASHINGTON -- When historians examine President Trump's tax program, they will surely be struck by a large and momentous contradiction. Although the nation faces endless budget deficits -- and although the president purports to speak about the future -- his tax program does little or nothing to curb long-term deficits and, arguably, might make them worse.
It is said that the tax gap of the Trump-Republican program -- the net amount of the tax cut -- is somewhere between zero (the administration's position -- the tax cut will pay for itself through stronger economic growth) and $1.5 trillion over a decade (the position of many economists who doubt much of a boost to economic growth).
Wrong, on both counts. A more realistic estimate of the tax gap is somewhere between $7 trillion and $12 trillion, again over a decade.
How do I get these fantastic figures? The answer is that I ignore Trump's program altogether and simply deal with existing deficits, as estimated by the Congressional Budget Office (CBO). It's not that I believe that Trump's program will work as promised. I don't. My real point is that, in many ways, it's too small to matter.
Even if it works, it won't cure chronic deficits. And neither party is pretending it will. Both find it more convenient to argue over the plan's distributional effects -- are the rich and well-to-do unfairly favored? -- than to close the gaping deficits.
Here's some basic arithmetic that reinforces my point. Although it's a bit tricky, stick with me.
Our economy -- the annual production of goods and services, or gross domestic product (GDP) -- is now approaching $20 trillion. So every 1 percent of GDP is worth about $200 billion. In fiscal 2017, the deficit was 3.5 percent of GDP, or almost $700 billion. Over a decade, and assuming unrealistically that the deficit doesn't rise, taxes would need to increase by $7 trillion in today's dollars to balance the budget.
But what if the deficit does rise? By the late 2030s, the CBO estimates that annual deficits will reach 6 percent of GDP, almost doubling from their present level. The increase mainly reflects the growing number of elderly drawing Social Security, Medicare and Medicaid, in addition to swelling interest payments on the existing debt. To balance the budget would require annual tax increases averaging $1.2 trillion, or $12 trillion over a decade, both in today's dollars.
Either way, the required tax increase would be enormous, ranging from about a fifth of today's tax burden to about a third. If instead Congress tried to balance the budget by cutting spending, the reductions -- including defense -- would be huge.
Some tentative conclusions emerge from this exercise:
-- Plausible rates of economic growth aren't fast enough to eliminate massive deficits, though they would help. The required growth to do more than Trump has already proposed is simply too high. The present and estimated-future deficits are so large that they can only be reduced through the politically painful process of raising taxes or cutting spending.
-- The presumption of politicians of both parties, despite some loud rhetoric to the contrary, is that large deficits and growing federal debt do not now pose a serious threat to the economy. It's easier to defer major changes -- to hope that something will come along to cope with the deficits -- rather than wade into the quagmire of substantially higher taxes or lower spending.
-- If this optimistic assumption about deficits -- call it "benign neglect" of deficits -- turns out to be wrong, the U.S. economy faces a serious jolt somewhere in the future.
What's clear is that, regardless of the fate of Trump's tax program, it's not the be-all and end-all in economic policy that both friend and foe suppose it to be.
(c) 2017, The Washington Post Writers Group