Remember the U.S. budget deficit? Back when Barack Obama was president, Republicans used to stew about it constantly, issuing dire warnings about the consequences of Mr. Obama's red ink. They said spending on Medicare and Social Security (they rarely mentioned defence) was driving the federal government into bankruptcy. The world and financial markets paid attention for a while, especially when it looked like the United States could be headed for the same debt wall that sank Greece. But even as the recovery took hold, and the threat of a debt crisis faded, Republicans continued to warn about "Democratic" deficits.
Deficit hawks could be forgiven, then, for expecting balanced budgets to become a priority when Donald Trump won the White House and Republicans took over both chambers of Congress. Mr. Trump ran for office pledging to tackle the $20-trillion (U.S.) federal debt, while House of Representatives Speaker Paul Ryan finally appeared to be in a position to get Congress to pass the balanced budget blueprint he had introduced year after year under Mr. Obama to no avail.
Funny thing. The Ryan plan has disappeared from the radar. In fact, the Republican-led Congress has yet to pass a complete budget in the Trump era, with most tax and spending programs operating on autopilot. The most significant budget-related bill so far signed by Mr. Trump happens to be a deal he did last month with Democrats to raise the U.S. debt-ceiling.
And the deficit in all of this? It appears to have been forgotten. The long-awaited tax reform proposal the White House tabled last week does not even contain the word. Maybe that's because, if enacted – and, given the Trump administration's legislative batting average, it's an even bigger "if" than usual – it would dig the federal government into an even deeper hole than it is in now.
Of course, Trump administration officials will deny that. Renewing with the supply-side, or trickle-down, economics of Ronald Reagan and George W. Bush, Mr. Trump promises that his "giant, beautiful, massive" tax cuts, skewed in favour of the richest Americans, will benefit everyone. An ensuing boom will boost tax revenues. And, as Treasury Secretary Steven Mnuchin adds: "Not only will this tax plan pay for itself, but it will pay down the debt."
Where have we heard that before? That argument is widely attributed to economist Arthur Laffer, whose so-called Laffer curve was the inspiration for Mr. Reagan's 1981 move to slash the top marginal tax rate from 70 per cent to 50 per cent. Back then, the ratio of federal debt to gross domestic product was 24 per cent. This year, it is set to hit 77 per cent.
The federal budget deficit, which peaked at $1.4-trillion in 2009, is expected to come in at around $700-billion for the fiscal year that ended on Sept. 30. The Congressional Budget Office projects the deficit will hit $1.4-trillion again in 2027, when the debt-to-GDP ratio is set to surpass 91 per cent – based on current tax rates and federal spending programs and average annual economic growth of 1.9 per cent. Most experts contend the Trump tax plan would blow the CBO's deficit projections out of the water.
Mr. Mnuchin counters that the administration's plan, which involves lowering the top marginal tax rate to 35 per cent from the 39.6 per cent level to which Mr. Obama raised it, would boost economic growth to 2.9 per cent a year over the next decade. That would largely make up for the $2.2-trillion budget hole that the Committee for a Responsible Federal Budget estimates would result from the Trump tax plan, which also proposes to slash the corporate tax rate to 20 per cent from 35 per cent and eliminate the federal estate tax.
No one denies the economy would get a boost from the Trump tax cuts. But just as there is a level beyond which higher marginal tax rates lead to a decline in tax revenues – any rate beyond 50 per cent is widely considered to yield diminishing returns – too much tax-cutting at the top end is also a budget killer. Republicans talk a good game about slashing government spending – especially for those most in need of it, such as the beneficiaries of Obamacare – but they almost never deliver.
Mr. Trump's tax plan could well follow the trajectory of most of his legislative proposals so far – into the trash can. If you think deficits matter, that would be the best outcome.
Konrad Yakabuski