Just Taxes Blog by ITEP

Treasury’s 1-Page Memo Reasserts False Claims that Tax Cuts Largely Pay for Themselves — But Only When Accompanied by Spending Cuts

Treasury’s 1-Page Memo Reasserts False Claims that Tax Cuts Largely Pay for Themselves — But Only When Accompanied by Spending Cuts

December 12, 2017

Treasury Secretary Steven Mnuchin claimed for weeks that his department would release a study showing that the $1.5 trillion tax cut moving through Congress would “pay for itself.” On Monday he released a one-page memo that asserts, without evidence, that economic growth resulting from President Trump’s policies would raise enough revenue to more than offset the costs of the tax cuts.

The memo states that Treasury assumed annual growth would reach 2.9 percent as a result of Trump’s policies, as claimed in his budget plan earlier this year. The memo does not mention any attempt by Treasury officials or anyone else to investigate whether such growth will occur — it’s just assumed.

As Kevin Hassett, chairman of President Trump’s Council of Economic Advisers, said on CNBC, “If you just assume you would get that kind of growth, then you say how much revenue you get from that.”

The difference between the 2.9 percent growth projection used by the administration and the 2.2 percent growth projection used by most respectable economists may sound like a trivial matter, but it makes a huge difference in predicting how much tax revenue will be collected.

As an ITEP report from this summer pointed out, the administration’s projected growth would require the output of the average worker to increase to an unprecedented degree. Unlike previous periods in the nation’s history when our workforce was expanding (as women entered the workforce, for example), today we face the retirement of the baby-boomers, which will restrict the size of the economy rather than expand it.

Despite Mnuchin’s willingness to make claims without supporting evidence, the memo still does not claim that the $1.5 trillion tax plan will “pay for itself” as he said earlier. It says that some of the new growth would also come from “a combination of regulatory reform, infrastructure development, and welfare reform as proposed in” Trump’s budget plan from earlier this year. “Welfare reform” in this context means cuts in spending programs.

For years, some Republicans have used the ideology of “supply-side” economics to suggest that there would be no trade-off between tax cuts and government spending because tax cuts would boost the economy enough to pay for themselves. Of course, this is nonsense. The Joint Committee on Taxation and the Tax Policy Center have found that the tax plan would create nowhere near enough economic growth to pay for itself.

But the real problem for Republicans has always been that if their supply-side theory is true, then there would be no obvious need to enact their other long-term goal: cuts in government spending. Mnuchin’s memo tries to have it both ways, claiming wild economic growth will make tax breaks cost-free but also insisting that benefits for households must be cut to achieve growth. Given how illogical all of this is, it’s no wonder he gave up on doing any real analysis.