The Unworkable Math of Trump’s Budget

Regardless of the details, the budget released Tuesday by the Trump administration was likely to be met with opposition from the Democrats for the scope of the cuts it proposed to programs that help low-income Americans. But, big-picture disagreements aside, people assumed that those details would at least add up.

Not the case: There appears to be a major problem with the details of Trump’s budget—namely, that it fails to account for the loss of trillions of dollars of revenue that will result from the tax cuts it proposes. Left-leaning economists have been quick to highlight the omission, which, as former Treasury Secretary Larry Summers wrote in The Washington Post, “would justify failing a student in an introductory economics course.” Others are characterizing it not as an error but a deliberate manipulation: “The unreality/gimmicks in this budget are an [sic] unprecedented, epic scale,” Jason Furman, former chairman of the Council of Economic Advisers under Barack Obama, wrote on Twitter.

In short, the budget fails to properly use what is called dynamic scoring, which tries to capture how policy changes will affect future revenues. In the budget, the administration forecasts healthy economic growth in the years ahead—specifically, that the economy will grow at a rate of three percent annually in many of the coming years (more on that rosy number later). Why do they think the economy will grow so much? Because, as the budget says, “a comprehensive overhaul to our tax code will boost economic growth and investment”—a reference to Trump’s proposal to lower the tax rate for corporations from 35 percent to 15 percent, and to decrease the top income tax rate from 39.6 percent to 35 percent.

But here’s the catch: The budget then goes on to predict that that growth will, in turn, create $2 trillion in additional revenue. Except for one thing: The administration appears to have neglected to account for the lower tax rates in calculating the revenues. “Even if you accept that the tax cut will unleash all this growth, the budget somehow forgot to include the cost of the tax cut that is producing all of that growth,” Furman, who is now a senior fellow at the left-leaning Peterson Institute for International Economics, told me. “That’s a several-trillion-dollar mistake.”

According to the Committee for a Responsible Federal Budget, the cost of those tax cuts could be as high as $5.5 trillion over a decade. In the budget, they don’t appear to affect revenues at all—other than in generating more revenue, on account of the economy growing so much. The administration is essentially double-counting the benefits of the tax cuts, predicting that they will not only create more revenue but that the additional revenue will be enough to close the deficit.

The White House did not respond to immediate requests for comment. It did tell The Wall Street Journal that the budget does not double-count anything, saying that a policy of limiting tax deductions and closing tax loopholes would further boost revenue. But this contradicts previous White House statements that have said that the growth created by the tax cuts alone would offset their cost, but not provide additional revenues beyond that.

The budget contains other dubious calculations as well. For example, take that 3 percent growth rate. The budget acknowledges that U.S. GDP grew 2.6 percent in 2015 and 1.6 percent in 2016, but projects that growth will accelerate in coming years, with GDP growing 2.3 percent this year, 2.7 percent in 2019, and then at a rate of 3 percent a year beginning in 2021. According to most economists, this is a highly unrealistic projection. The Congressional Budget Office (CBO), for example, projects average real growth of 1.8 percent over the next decade, compared to 2.9 percent over the next decade that the Trump budget counts on. In the past two decades, growth estimates from the Office of Management and Budget (OMB), which puts out these budget numbers, has on average been just 0.2 percentage points higher than the CBO estimates. The Trump OMB number are 1.1 percentage points higher—a true outlier.

“Achieving 3 percent economic growth would require a heroic combination of good policy and good luck,” analysts from the Committee for a Responsible Federal Budget wrote in a report Tuesday about Trump’s budget. According to that report, which uses the CBO’s growth projections, deficits will not disappear by 2027, as the Trump administration predicts, but rather will stay at current levels.

In another example of an unlikely projection, the budget plans to save $6 billion between 2018 and 2022 by improving the solvency of the Pension Benefit Guaranty Corporation (PBGC), a government agency that insures private pensions. But this is a tall order: According to the CBO, the PBGC could run out of money soon. Multi-employer defined-benefit plans covered under PBGC have promised $850 billion worth of benefits, but have assets of only $400 billion, for example. How the government will save money from PBGC when the agency is far more likely to be a drain on government coffers remains a mystery, and the budget makes no reference to how it will improve PBGC solvency.

In addition, as the New York Times reporter Binyamin Appelbaum pointed out on Twitter, the Trump budget also estimates that the Federal Reserve will deposit higher earnings to the government than the CBO has projected, by about $100 billion, again with no obvious explanation. And, as Appelbaum writes, Trump has pledged to get rid of the estate tax, but his budget shows receipts for estate and gift taxes rising every year, doubling from $21 billion in 2016 to $43 billion in 2027.

Even some Republicans admit that the budget projections are a little optimistic. “It’s like all budgets, the Republican House budget included. It’s got some rosy assumptions in it, and there are some things that are a little bit gimmicky,” Representative Tom Cole of Oklahoma, a senior House Republican who serves on the budget and appropriation committees, told my colleague Russell Berman, in a phone call.

And it is true that this is an initial budget, and most initial budgets are not particularly detailed. But Furman says that in his experience, OMB staff tries to discourage “conceptual” accounting. “I imagine that there were staff-level warnings that they were doing this,” he said. Trump is known for not being particularly detail-oriented; he tends to think about big-picture ideas and leave the specifics up to his staff. But a budget is a document that depends on specifics—it comes down to where the government is going to get its money and exactly where it plans to spend it. Failing to account for the price tag of tax cuts, or the costs of proposed policy changes, is an error that could have huge implications.