Trump and Congress are now hard at work on tax reform, promising huge cuts in both corporate and individual taxes. How is that possible without blowing a gigantic hole in the budget and sending the national debt on a new trajectory? Here’s how Treasury Secretary Steve Mnuchin explains it in the above-linked article:
Mnuchin told Fox the administration would use its own economic assumptions to gauge the impact of its tax cuts on the federal budget deficit and the $20 trillion national debt, a key issue in Washington’s intensifying tax debate.
“It will be revenue neutral under our growth assumptions,” Mnuchin said. The administration believes that tax cuts will lead to much faster growth than do congressional analysts or private forecasters.
“So, we can pay for these tax cuts with economic growth,” he added.
That’s absolute nonsense, and he knows it. Yes, cutting taxes will boost economic growth, but only by the amount of the tax cut. Suppose that the combined corporate and individual cuts result in a cut of $1 trillion per year. If every dollar of that was spent domestically and not put into savings, then GDP (gross domestic product) would grow by $1 trillion. And let’s suppose that this is taxed at a rate of 25%. That’s federal revenue of $0.25 trillion. So revenue would actually decline by $0.75 trillion. The only way for it to be revenue neutral would be if the $1 trillion tax cut mysteriously generated $4 trillion in spending. That’s impossible. It’s simple math.
However, there is a way to make these tax cuts revenue neutral. Include a new source of revenue by taxing foreign exporters who are getting a free ride in the American economy. Last week, the Commerce Department released the trade figures for the month of July. Contrary to Trump’s promise that this “stops right here and stops right now,” the deficit in manufactured goods has actually gotten worse. Take a look at this chart: Manf’d Goods Balance of Trade. The deficit in manufactured goods is now running approximately $63 billion per month, or $750 billion per year. Exports haven’t risen one iota in six years, while imports have soared by $25 billion and are running approximately $2 trillion per year.
Now, consider what a 30% tariff (or border tax) would do. First of all, it would drastically reduce imports – by half, let’s say. That means that $1 trillion of manufacturing would return to the U.S. That’s how much the GDP would grow. Taxed at 25%, that would be a new stream of revenue of $250 billion. That leaves $1 trillion in imports that would be taxed at 30% – another new stream of revenue that totals $300 billion. Add these revenue streams totalling $550 billion to the revenue generated by the increase in GDP created by the tax cut – $250 billion – and you have revenue of $800 billion – nearly off-setting the loss of revenue caused by the tax cut.
In late August, Trump reportedly told John Kelly, his chief of staff, that “I want tariffs. Bring me some tariffs!” Now’s the time to do it. Roll the tariffs into the tax reform package and no senator or congressman will be willing to tell his/her constituents that “I voted to keep your taxes high because I don’t like tariffs.” It’d be political suicide.
The time has come to make foreign manufacturers pay their fair share for access to the American market.