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Clinton, Trump and Budget-Busting Tax Cuts

Monday, August 01, 2016 By Dean Baker, Truthout | Op-Ed
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(Photo: Ken Teegardin; Edited: LW / TO)(Photo: Ken Teegardin; Edited: LW / TO)

At the Democratic convention we got some insights into the Clinton campaign's line of attack on Donald Trump. While they rightfully intend to confront his racism, sexism and xenophobia, the Clinton campaign also seems prepared to attack Trump's "budget-busting" tax cuts. This is an area where caution would be advised.

The basic story is that, in the usual Republican tradition, Trump wants to give huge tax cuts targeted primarily to the wealthy. According to calculations from the Tax Policy Center of the Urban Institute and the Brookings Institution, these tax cuts will cost $9.5 trillion in lost revenue over the next decade before accounting for interest.

Of course $9.5 trillion is a REALLY BIG NUMBER, and you can often scare people with really big numbers. But if we want to be serious about matters, we need to put this number in some context. The Congressional Budget Office projects that over the next decade, Gross Domestic Product (GDP) will be roughly $240 trillion. That means that the amount of revenue lost due to Donald Trump's tax cuts plan will be just under 4 percent of GDP. Given that we now spend 3.5 percent of GDP on the military, this is real money.

But before we join the "budget-buster" chorus, it is worth remembering that the economy is suffering from a serious shortfall of demand. This is the concept of "secular stagnation" that is now being embraced by many of the world's most prominent economists. Before the 2008 recession, most economists did not take seriously the idea that the economy could suffer from a sustained shortfall in demand.

But in the years since the downturn, economists such as Paul Krugman, Larry Summers and Olivier Blanchard, the former chief economist at the International Monetary Fund, have all raised concerns about secular stagnation. This means that they believe the economy needs additional spending in order to boost demand and employment and bring the economy's level of output back towards its potential.

In this context, a proposal to have a big tax cut actually could make a great deal of sense. It would put more money in people's pockets, which they could then spend. This increase in demand will lead companies to increase output and employment.

This doesn't mean Trump's tax cut is the best way to boost demand in the economy. First, the bulk of the tax cut goes to the people at the top of the income ladder. These are the people who already are doing very well. It seems more than a bit odd to be giving them a huge tax cut to make them still richer.

Furthermore, if the point is to have people actually spend the money, it would make far more sense to have the tax cut directed at low- and middle-income people. If we give Bill Gates another $1 billion, it likely wouldn't affect his spending at all. On the other hand, if we gave a million low and moderate people $1,000 each, we would likely see spending increase by close to $1 billion.

Even better, the government can spend $1 billion directly on modernizing our infrastructure, paying for research into clean energy and other areas, and improving education, and child care. These expenditures would boost demand and also increase productivity so that we would be able to produce more in the future. If we could somehow get Congress to agree to spend Trump's $9.5 trillion tax cut on investment in these and other areas, it would be a great thing for the economy.

In fact, even here it is possible that the $9.5 trillion is too much. We do need additional spending to boost the economy, but we probably don't need the $950 billion in additional annual demand that we'd get from using Trump's tax cut for investment. (This is before including a multiplier effect.) Spending of this size probably would over-stimulate the economy, leading to higher interest rates and/or a serious run-up in the inflation rate.

But the idea of spending more and running larger budget deficits is a good one. Trump may take it too far and want to give all the money to rich people, but he is not wrong for wanting to increase the budget deficit to boost the economy. This is a position that progressives should embrace and ideally force the Democratic presidential candidate to embrace.

So when it comes to the Trump tax plan, we can criticize him for wanting to give so much money to rich people and for his unwillingness to support necessary public investments. But by deriding the Trump plan as a "budget buster," we make getting support for these investments even more difficult. There are plenty of legitimate reasons for attacking Trump. It would be best to stay away from the illegitimate ones.

Copyright, Truthout. May not be reprinted without permission.

Dean Baker

Dean Baker is a macroeconomist and codirector of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.

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Clinton, Trump and Budget-Busting Tax Cuts

Monday, August 01, 2016 By Dean Baker, Truthout | Op-Ed
  • font size decrease font size decrease font size increase font size increase font size
  • Print

(Photo: Ken Teegardin; Edited: LW / TO)(Photo: Ken Teegardin; Edited: LW / TO)

At the Democratic convention we got some insights into the Clinton campaign's line of attack on Donald Trump. While they rightfully intend to confront his racism, sexism and xenophobia, the Clinton campaign also seems prepared to attack Trump's "budget-busting" tax cuts. This is an area where caution would be advised.

The basic story is that, in the usual Republican tradition, Trump wants to give huge tax cuts targeted primarily to the wealthy. According to calculations from the Tax Policy Center of the Urban Institute and the Brookings Institution, these tax cuts will cost $9.5 trillion in lost revenue over the next decade before accounting for interest.

Of course $9.5 trillion is a REALLY BIG NUMBER, and you can often scare people with really big numbers. But if we want to be serious about matters, we need to put this number in some context. The Congressional Budget Office projects that over the next decade, Gross Domestic Product (GDP) will be roughly $240 trillion. That means that the amount of revenue lost due to Donald Trump's tax cuts plan will be just under 4 percent of GDP. Given that we now spend 3.5 percent of GDP on the military, this is real money.

But before we join the "budget-buster" chorus, it is worth remembering that the economy is suffering from a serious shortfall of demand. This is the concept of "secular stagnation" that is now being embraced by many of the world's most prominent economists. Before the 2008 recession, most economists did not take seriously the idea that the economy could suffer from a sustained shortfall in demand.

But in the years since the downturn, economists such as Paul Krugman, Larry Summers and Olivier Blanchard, the former chief economist at the International Monetary Fund, have all raised concerns about secular stagnation. This means that they believe the economy needs additional spending in order to boost demand and employment and bring the economy's level of output back towards its potential.

In this context, a proposal to have a big tax cut actually could make a great deal of sense. It would put more money in people's pockets, which they could then spend. This increase in demand will lead companies to increase output and employment.

This doesn't mean Trump's tax cut is the best way to boost demand in the economy. First, the bulk of the tax cut goes to the people at the top of the income ladder. These are the people who already are doing very well. It seems more than a bit odd to be giving them a huge tax cut to make them still richer.

Furthermore, if the point is to have people actually spend the money, it would make far more sense to have the tax cut directed at low- and middle-income people. If we give Bill Gates another $1 billion, it likely wouldn't affect his spending at all. On the other hand, if we gave a million low and moderate people $1,000 each, we would likely see spending increase by close to $1 billion.

Even better, the government can spend $1 billion directly on modernizing our infrastructure, paying for research into clean energy and other areas, and improving education, and child care. These expenditures would boost demand and also increase productivity so that we would be able to produce more in the future. If we could somehow get Congress to agree to spend Trump's $9.5 trillion tax cut on investment in these and other areas, it would be a great thing for the economy.

In fact, even here it is possible that the $9.5 trillion is too much. We do need additional spending to boost the economy, but we probably don't need the $950 billion in additional annual demand that we'd get from using Trump's tax cut for investment. (This is before including a multiplier effect.) Spending of this size probably would over-stimulate the economy, leading to higher interest rates and/or a serious run-up in the inflation rate.

But the idea of spending more and running larger budget deficits is a good one. Trump may take it too far and want to give all the money to rich people, but he is not wrong for wanting to increase the budget deficit to boost the economy. This is a position that progressives should embrace and ideally force the Democratic presidential candidate to embrace.

So when it comes to the Trump tax plan, we can criticize him for wanting to give so much money to rich people and for his unwillingness to support necessary public investments. But by deriding the Trump plan as a "budget buster," we make getting support for these investments even more difficult. There are plenty of legitimate reasons for attacking Trump. It would be best to stay away from the illegitimate ones.

Copyright, Truthout. May not be reprinted without permission.

Dean Baker

Dean Baker is a macroeconomist and codirector of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.