Topic: Tax and Budget Policy

New CBO Numbers and the Simple Formula for Good Fiscal Policy, Part II

Based on new 10-year fiscal estimates from the Congressional Budget Office, I wrote yesterday that balancing the budget actually is very simple with a modest bit of spending restraint.

If lawmakers simply limit annual spending increases to 1 percent annually, the budget is balanced by 2022. If spending is allowed to grow by 2 percent annually, the budget is balanced by 2025. And if the goal is balancing the budget by the end of the 10-year window, that simply requires that spending grow no more than 2.63 percent annually.

I also pointed out that this wouldn’t require unprecedented fiscal discipline. After all, we had a de facto spending freeze (zero percent spending growth) from 2009-2014.

And in another previous column, I shared many other examples of nations that achieved excellent fiscal results with multi-year periods of spending restraint (as defined by outlays growing by an average of less than 2 percent).

Today, we’re going to add tax cuts to our fiscal equation.

Some people seem to think it’s impossible to balance the budget if lawmakers are also reducing the amount of tax revenue that goes to Washington each year.

And they think big tax cuts, such as the Trump plan (which would reduce revenues over 10 years by $2.6 trillion-$3.9 trillion according to the Tax Foundation), are absurd and preposterous.

After all, if politicians tried to simultaneously enact a big tax cut and balance the budget, it would require deep and harsh spending cuts that would decimate the federal budget, right?

Nope. Not at all.

They just need to comply with my Golden Rule.

 

 

Confusion over Infrastructure

The Christian Science Monitor thinks that the Democrats wrote their infrastructure plan as a “political bridge to President Trump.” Fox News thinks that Trump might “get on board” the Democrats’ plan. Statements like these show that many reporters–and by extension members of the public–haven’t yet figured out the real issues behind the infrastructure debate.

As Business Insider points out, there’s a bigger difference between the two sides over “how it’s paid for” than “what gets built.” The Democrats want the federal government to spend a trillion dollars, money it would have to borrow. Trump wants private investors to spend their own money. Never the twain shall meet. 

But Business Insider doesn’t understand how Trump’s idea will work. If Trump is going to rely on the private sector, it says, then only projects that generate revenue will be built because “projects that don’t generate revenue for the private sector generally don’t get financed.” But there are two kinds of public-private partnerships. The kind that Business Insider is writing about is called demand risk because the private partner takes the risk that tolls, fares, or other user fees won’t repay the cost.

The second kind is called availability payments because the government agrees to pay the private partner the cost of the project over time, whether or not anyone pays user fees or even uses it at all. In this kind, the public takes the risk. While I much prefer the demand-risk form because I think nearly all infrastructure ought to be paid for out of user fees, Trump may be happy to go with availability payments so long as state or local governments are making the payments, not the feds. Democrats in Congress don’t like either one because they short-circuit their ability to appear to give gifts to their constituents.

Privatize to Drain the Swamp

The new mayor of São Paulo is showing the way if President Trump wants to follow through on his “drain the swamp” pledge. According to today’s Wall Street Journal:

The multimillionaire star of the Brazilian version of “The Apprentice” TV show, who took over as São Paulo’s mayor this month, is set to embark on the biggest municipal privatization drive in the country’s history.

João Doria, who won a landslide victory in October and has drawn comparisons to U.S. President Donald Trump, said in an interview with The Wall Street Journal he plans to sell off everything from São Paulo’s carnival venue to rights to the city’s cemeteries, aiming to raise more than 7 billion reais (about $2.2 billion).

The plan by the businessman-turned-mayor comes as Brazil looks to shrink its cumbersome and graft-ridden government apparatus in the wake of a vast corruption scandal that has destroyed voters’ faith in traditional politicians.

“The heavy role of the state is one of Brazil’s most serious problems—it is inefficient and it invites corruption,” said Mr. Doria.”

The problem is the same in the United States, and so is the solution.

New CBO Numbers and the Simple Formula for Good Fiscal Policy, Part I

The Congressional Budget Office, as part of The Budget and Economic Outlook: 2017 to 2027, has just released fiscal projections for the next 10 years.

This happens twice every year. As part of this biannual exercise, I regularly (most recently here and here) dig through the data and highlight the most relevant numbers.

Let’s repeat that process. Here’s what you need to know from CBO’s new report.

  • Under current law, tax revenues over the next 10 years are projected to grow by an average of 4.2 percent each year.
  • If left on autopilot, the burden of government spending will rise by an average of 5.2 percent each year.
  • If that happens, the federal budget will consume 23.4 percent of economic output in 2027 compared to 20.7 percent of GDP in 2017.
  • Under that do-nothing scenario, the budget deficits jumps to $1.4 trillion by 2027.

But what happens if there is a modest bit of spending restraint? What if politicians decide to comply with my Golden Rule and limit how fast the budget grows every year?

This shouldn’t be too difficult. After all, even with Obama in the White House, there was a de facto spending freeze between 2009-2014. In other words, all the fights over debt limits, sequesters, and shutdowns actually yielded good results.

So if the Republicans who now control Washington are serious about protecting the interests of taxpayers, it should be relatively simple for them to adopt good fiscal policy.

And if GOPers actually decide to do the right thing, the grim numbers in the CBO’s new report quickly turn positive.

  • If spending is frozen at 2017 levels, there’s a budget surplus by 2021.
  • If spending is allowed to grow 1 percent annually, there’s a budget surplus by 2022.
  • If spending is allowed to grow 2 percent annually, there’s a budget surplus by 2025.
  • If spending is allowed to grow 2.63 percent annually, the budget is balanced in 10 years.
  • With 2.63 percent spending growth, the burden of government spending drops to 18.4 percent of GDP by 2027.

To put all these numbers in context, inflation is supposed to average about 2 percent annually over the next decade.

McCain/Thornberry Military Plan would Boost Spending, Deficits, and Dangers

Congressional Republicans have a new plan for a military spending boost. John McCain, the Chairman of the Senate Armed Services Committee, last week released a report calling for a $54 billion increase in 2018 Pentagon spending and a $430 billion increase above current Pentagon plans for the next five fiscal years. McCain’s House counterpart, Mac Thornberry, backed that plan today in a Fox News op-ed. Both chairmen also want an immediate “supplemental” increase of an indeterminate amount to the 2017 military budget. 

Enacting the McCain/Thornberry plan requires undoing the defense spending caps set by the Budget Control Act. Complying with the caps would shave more than $100 billion off existing plans over the next five years, meaning that the new plan would spend more than half a trillion more than current law allows. That’s before counting any 2017 supplemental or Overseas Contingency Operations (OCO) funding, currently at $59 billion. The plan calls for transferring OCO spending, which is now uncapped, back into the base budget once the abolishment of the Budget Control Act leaves it unconstrained.

The title of Thornberry’s op-ed, Here’s How We Will Make America’s Military Great Again, suggests its intended audience. During the campaign, President Trump endorsed an across-the-board military buildup likely to cost $70 to $100 billion a year but absurdly claimed that he could fund it by cutting Pentagon waste, fraud, and abuse. Since his election, Trump and his advisors have done little to clarify how they’ll fund the buildup or use the expanded military, besides parading it down Pennsylvania Avenue.

Will House Republicans’ “Border Adjustable” Tax Plan Cause a Trade War? (Spoiler: Maybe Not!)

Perhaps the highest legislative priority for House Republicans in the 115th Session of Congress is an overhaul of the United States’ antiquated and onerous corporate tax code. The details of the GOP plan aren’t out yet—it’s only summarized in a House Republican “blueprint” and the legislative text hasn’t been finalized—but the general idea is to replace the current 35% “worldwide” corporate income tax with a 20-25% “destination-based” tax on corporations’ US sales (i.e., including domestic sales of imports in the tax base, but excluding export sales—so called “border tax adjustments”).

This “destination-based cash-flow tax” (or “#DBCFT” as the tax nerds are now calling it on the interwebs) would be a fundamental shift in how (and on what) American corporations now pay tax, and it raises complex economic issues—including how trade would be affected—that I wouldn’t dare try to navigate here (but these analyses are a good start). 

On the other hand, the DBCFT debate also has addressed whether the tax plan would be consistent with World Trade Organization (WTO) rules on “border adjustable” taxes, with some folks already going so far as to claim that any version of the DBCFT would violate the United States’ international obligations and thus expose US exports to billions of dollars-worth of WTO-sanctioned retaliation. As I discuss below, however, that assumption’s not really correct; in fact, there is a very good argument that the DBCFT, if properly constructed, would pass muster at the WTO and thereby avoid potential retaliatory tariffs on US exports.

The False Promise of “Buy American”

If patriotism is the last refuge of scoundrels, where will President Trump turn when his “America First” policies lay waste to the very people he professes to be helping?

The ideas conjured by “Buy American” may appeal to many of President Trump’s supporters, but the phrase is merely a euphemism for doling political spoils, featherbedding, and protectionism. The president may score points with union bosses, import-competing producers, and some workers, but at great expense to taxpayers, workers and businesses more broadly.

Cordoning off the estimated $1.7 trillion U.S. government procurement market to U.S. suppliers would mean higher price tags, fewer projects funded, and fewer people hired. In today’s globalized economy, where supply chains are transnational and direct investment crosses borders, finding products that meet the U.S.-made definition is no easy task, as many consist of components made in multiple countries. And by precluding foreign suppliers from bidding, any short-term increases in U.S. economic activity and jobs likely would be offset by lost export sales – and the jobs that go with them – on account of copycat protectionism abroad.