BIPP: GOP Tax Plan: Budget-Buster?

Zachary Krivine, Contributing Writer

Having produced no major legislative victories, President Donald Trump and Congressional Republicans are facing a great deal of pressure to pass their tax overhaul, likely the most comprehensive tax reform since 1986. The merits of the bill have been discussed and debated for months, but the bill seems destined to pass the Senate after clearing the House. Yet, the critics are still vocal, perhaps their most potent talking point being that increased tax revenue as a result of growth due to tax changes will not offset the $1.4 trillion increase in the federal budget deficit over ten years. This notion is supported by the most recent scoring of the bill by the Congressional Budget Office (CBO).

Are these figures grounded in reality? To a degree, they are. The increases to the deficit predicted by the CBO score, at least in the short-term, will likely be reflected within the next few years. However, just because these scores are grounded in reality doesn’t mean they will constitute reality. For example, a 2003 capital gains tax cut was anticipated by CBO to generate $215 billion in revenue through 2007 but ended up producing $377 billion in revenue.

Therefore, neither the $1.4 trillion increase in the deficit predicted by the CBO nor the notion asserted by Trump’s chief economic advisor Gary Cohn that the plan will be revenue-neutral over the same ten years are guaranteed to occur. There are, of course, many moving parts. For example, a combination of a lower corporate income tax combined one-time tax rate of 12 percent on cash returns and 5 percent on non-cash for corporate money repatriated from overseas should help spur movement of money kept in foreign bank accounts back to domestic ones. Yet, the tax bill also eliminates almost every corporate tax deduction with the exception of the research and development credit and the low-income housing investment credit. So, on the one hand, it may be advantageous for many companies to bring their capital back inside American borders, but how the elimination of these deductions will affect this is unclear.

It is important to acknowledge that with any piece of legislation, particularly a tax bill, there are winners and losers. Aside from whether you and your family fall into one of the two categories, there should be many factors affecting your judgment of this bill. For one, the deficit fears are real. Most economists are in agreement that a deficit-neutral result of this bill is highly unlikely. Much of the justification for the deficit increase of the broader tax bill is that certain cuts will expire after ten years and so its long-term impact on the deficit will not be as serious.

However, it is unrealistic to expect that these tax cuts will be allowed to expire by Congress (tax cuts are popular). Furthermore, the Trump administration has yet to push a highly-touted infrastructure bill that would almost certainly drive a higher deficit. Regardless of where you stand on the tax overhaul, it should be acknowledged that its overall impact is fluid and is currently lacking clarity. If debated, it should be done taking these factors into account.

(Visited 115 times, 1 visits today)