Donald Trump’s $10 Trillion Debt Bomb

ntnldbtDonald Trump is no supply-sider, as is evidenced by his pro-tariff and restrictionist immigration stands. Supply-side, from its inception, is all about job growth and equitable prosperity. Both would be hurt by such autarkical prescriptions. Trump doesn’t get it.

His tax plan, while superficially supply-side in that it lowers rates somewhat, carries a heavier burden of proof than it has received from some veteran supply-siders. The mulligan given Trump is a tribute to the ever-sunny disposition and native optimism of most supply-siders. Trump and his tax reform plan drew mixed reviews even on the supply side from such thoughts leaders as Forbes.com’s own John Tamny, recently, in Did Republican Partisans Actually Read Trump’s Tax Plan.

The two kindest, and most astute, points noted in favor of the plan were made by Tamny, “Trump’s decision to not support the subsidization of capital investment is correct,” and by supply-sider Jeff Bell writing in APP’s ThePulse2016.com (whose sister organization I professionally advise) who observed “Unlike most recent Republican plans, Trump avoids single year expensing for corporate investment in new physical capital (machines and buildings). Though rarely highlighted by its advocates, it is so expensive it preempts the ability to cut personal rates very much, without huge projected deficits.”

Supply-side economics in its iconic Jack Kemp form is all about job creation and rising worker affluence. It’s fine if the rich get richer as long as the rest of us get richer too. That’s the American Dream. Trump’s version doesn’t offer that.

Supply-side is not about deficits. In a most exquisite of ironies, deficit-mongering neo-Keynesians (among others) defamed supply-side as, well, deficit-mongering. Supply-side was, and is, about balancing the budget through creating a larger private sector economic base, rather than by tax, especially tax rate, increases.

Trump’s plan threatens to blow out the federal debt from its current $18T by something like an additional $10T. This is antithetical so supply-side economics. And, while we’re at it: Tea Party Patriots? Call your office.

Most of the mainstream media (with the notable exception of Forbes, both iconic supply-sider Steve Forbes and writers for his eponymous publications) never really grasped supply-side economics. George H. W. Bush, in campaigning, against Reagan, for the 1980 Republican presidential nomination, memorably attacked supply-side as “voodoo economics.”

Bush meant to challenge the supply-side claim that we would increase federal tax revenues (including to fund Reagan’s proposed military spending increases instrumental in winning the Cold War) by lowering tax rates. The distinction between lowering tax rates and lowering taxes was confounded in Bush’s mind (and the mind of many others — including those of many of Reagan’s own advisers).

Had the claim been one of raising tax revenue by cutting taxes Bush would have been entirely right in calling it out as sorcery. However supply-side was (and is) not based on a claim that cutting taxes would raise tax revenues.

Supply-siders believed, and believe, that by cutting prohibitively high marginal tax rates (coupled with spending restraint) the deficit would transform into a surplus by virtue of the growth of the tax base. Supply-siders never prescribed deficit-fueled growth. That’s a Neo-Keynesian prescription. Supply-siders are classical liberals.

Notwithstanding Trump’s stated claim that his plan “Doesn’t add to our debt and deficit, which are already too large,” Trump’s new tax plan has been scored by the Tax Foundation as raising the national debt by around $10 trillion, after projected extra economic growth, over ten years. FactCheck.org reports that the Tax Policy Center also scores trillions in deficits from it.

Trump promises “tremendous” budget cuts to make up for the shortfall. Yet his chopping-block examples imply tens or hundreds of billions of dollars of budget cuts (from abusive contracting and from cutting the Department of Education, currently $67B/yr and EPA, currently $8.6B/yr).  Not trillions. Trump’s claims do not appear to add up.

Trump brags that his plan would produce 6% GDP growth. Of course, that would do it.

Such is the power of economic growth that, as supply-side economist Ike Brannon has pointed out, “The primacy of economic growth in generating tax revenue cannot be overstated: the fastest post-war increases in tax revenue growth occurred in 1997-2000 and 2004-2007, when revenues went up by nearly 50% in each instance. Tax rates did not go up at all during that time — the rapid increase in revenue occurred because we were in a sustained period of strong economic growth.”

Trump has provided no grounding for where he is deriving 6%. Jonathan Chait called Gov. Huckabee’s 6% as a “crazy number out of thin air.” Trump’s number is just as insubstantial. I, among others, have had enough of faith-based economics from the Neo-Keynesians at the Fed whose work is the laughingstock of Washington and Wall Street.

GDP growth basically is a factor of employed population growth (which his tax plan surely will not materially impact and his immigration stance would harm) plus productivity. Reagan averaged around 4% post-recession. Clinton experienced better than 4%. Are we really to believe that Trump will trump them? C’mon.

Trump’s tax reform plan doesn’t obviously tackle the real presenting problems of today: the big productivity bust and the failure of productivity gains to inure to workers. Stagflation, which supply-side economics was designed to, and did, cure was the presenting problem of the 1970s. With this plan Trump has trumped his wall with Mexico with an economic Maginot Line apparently designed to fight the last war.

Supply-siders then were claiming that federal income tax rates were in the prohibitive zone and that cutting rates would close the deficit through growth. We were proved right. The supply-side value proposition took longer to manifest due to other factors (such as political compromises delaying and diluting Kemp-Roth and the expense of winning the Cold War).

Yet indeed it proved correct. President Clinton adopted the supply side policies of cutting the capital gains rate and reforming welfare, while enjoying a peace dividend. Notwithstanding Clinton’s regrettable raising of the top rate, job creation and the economy boomed.

America ushered in an era of growth-induced federal surpluses. Surpluses? Now, that’s supply side economics. Neither the Reagan nor Clinton era experience supports a claim that the Trump tax plan will induce 6% growth.

Reagan dropped income tax rates across-the-board and the top rate, in two steps, from 70% to 28%. Reducing the top rate, as Trump proposes, from 39.6% to 25% is a much smaller rate reduction than was 70% to 28%. As such, this plan cannot confidently be expected to generate the same pace of economic growth as did Reagan … much less 50% higher.

Trump’s cutting corporate tax rates — a Holy Grail on the corporate right — might be a good thing. That said Kemp’s original foray into tax cutting — the Savings and Investment Act of 1974 — also was all about giving breaks to business. It went nowhere. To your average voter like me it sounds like the Boss is going to get to trade up her 90-foot yacht for a 120-foot yacht while we worker bees get, at best, crumbs. Again. Yet supply-side is all about creating a rising tide to lift all boats.

The real growth play, now, almost certainly resides in the other, far less recognized, portion of Reaganomics: restoring high integrity monetary policy. None of the candidates, Democratic or Republican, including Trump, have their eye on the ball.

Best guess so far is that Trump’s tax plan threatens to add $10T to the federal debt.  Let’s put that into perspective. CNBC reports there are just about ten million households in the US with $1M in investable assets over and above the value of their home. To pay for his tax plan Mr. Trump, it appears, metaphorically speaking, would need to borrow every investable dollar from every millionaire in America.

Of course it doesn’t actually work that way. President Trump likely will be borrowing that money from China … if China still would be willing to lend to Uncle Sam under a Donald Trump presidency.

There is a real way of restoring the American Dream through supply-side economics. Trump’s tax plan isn’t it. If Donald Trump, or any other candidate, really wishes to inherit the growth mantle from Ronald Reagan — as bestowed on Reagan by Kemp — the way to do so is hiding in plain sight.

Steve Forbes and Elizabeth Ames’s Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It shows exactly where general prosperity is holed up… and how classic supply-side economics can restore it. Want growth? Forbes and Ames provide what Hollywood calls “the Big Reveal.”

Or as we say in Washington: Follow the Money.

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