Deficit hawks warn: Tax reform must be paid for

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A day after Treasury Secretary Steve Mnuchin suggested economic growth could pay for a “majority” of President Trump’s tax reform proposal, debt hawks are sounding the alarm, warning that any tax overhaul must not add to the federal deficit.

“Conservatives are eager to do tax reform, but they’re also eager to address the massive debt and deficit,” a top aide to one key GOP senator told CBS News. “Tax reform that adds to the 10-year debt projection is pretty much dead on arrival with most Republican members of Congress.”

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“If it’s just pure tax cuts and no revenue-raising provisions, we don’t predict that any tax cut will pay for itself. There’s just no federal tax that’s bad enough to raise sufficient revenue by eliminating it,” explained Alan Cole, an economist with the conservative Tax Foundation. “It means you’re punting on the question of how the revenue will eventually be raised to pay for this.”

The Committee for a Responsible Federal Budget (CRFB) added Friday in a release, “Not paying for tax reform is extremely misguided, would explode the federal deficit and end up harming long-term economic growth prospects.”

On Thursday, Mnuchin acknowledged that eliminating loopholes and deductions will finance only a portion of Mr. Trump’s ambitious plan to overhaul the nation’s tax code.

“The deal will pay for itself,” Mnuchin declared during a question-and-answer session at the Institute of International Finance’s Washington Policy Summit. The secretary added, however, that the administration “fundamentally believe[s] in dynamic scoring” and will judge the proposal’s impact on the deficit accordingly.

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Since a rule change in 2015, the Congressional Budget Office has gauged the cost of various proposals using two distinct methods: traditional scoring and dynamic scoring. The traditional scoring method looks only at the text of legislation to determine its impact on the deficit -- specifically, the money a bill proposes to spend, and the methods the bill proposes to pay for it. The dynamic scoring method, by contrast, adds to that calculation an estimate of the bill’s impact on the broader economy.

Some conservatives have long argued that the cost of tax cuts should be evaluated using dynamic scoring, rather than traditional scoring. They don’t believe tax cuts must be fully paid-for in legislative text, clalming that the economic growth they create will counterbalance any additional money the tax cuts add to the national debt.

Some deficit watchdogs, however, argue that past tax cuts haven’t yielded the economic growth that proponents have promised. They believe dynamic scoring encourages fiscally irresponsible proposals that will blow up the deficit.

“There is no evidence that broad-based tax cuts can pay for themselves completely, and economic studies from across the spectrum have found that deficit-financed tax cuts only pay for a fraction of their cost,” the CFRB said in a blog post. “Even if tax cuts could generate more growth than estimated, no plausible amount of economic growth would be able to pay for the tax plan, let alone reduce deficits.”

CFRB president Maya MacGuineas added in an email that the administration must decide how it wants to spend any revenue accrued through growth. 

“The administration has been saying they were going to use economic growth to deal with our fiscal challenges and reduce the debt. Now they want to use growth effects to pay for tax cuts,” she explained. “You shouldn’t assume growth effects before they occur, and you sure shouldn’t count them twice.”