Administration officials have claimed in the past that tax reform would leave government revenues roughly unchanged. The reform would supposedly generate a lot of extra economic growth, and that added growth would result in new revenue to offset the tax cuts included in the reform. But this week the administration said that the new revenue will go to balancing the budget.
As Keith Hennessey explains, it’s got to be one or the other. Let’s assume, as the administration does, that added growth generates $2 trillion in extra revenue over ten years. Either you can use that revenue to reduce projected debt levels over the next ten years, or you can use it to finance $2 trillion in tax cuts while leaving projected debt levels unchanged. You can’t use it to do both.
Now that the double-counting has been pointed out, the administration is saying that it will use the new revenue for debt reduction. That means that they are aiming for a tax reform that a) leads to unchanged revenue levels even if no feedbacks from higher economic growth are counted and b) leads to $2 trillion in higher revenue than the current tax code when those feedbacks are counted. This creates a new problem, which is that nothing Trump or the Republicans have proposed so far come close to meeting these criteria. Getting there will require scaling back these proposals’ tax cuts, ramping up their tax increases, or both.