How Donald Trump’s tax plan could affect the national debt

By Jack Torry, The Columbus Dispatch, Ohio (TNS)

Wednesday, Dec. 28, 2016 | 2 a.m.

WASHINGTON — President-elect Donald Trump's plan to ask Congress to simultaneously cut taxes and increase defense spending risks transforming annual deficits during the next decade into a debt load the scale of which the federal government has never seen.

Trump's advisers and congressional Republicans say lower taxes on corporations and individuals, combined with reduced federal regulations on companies, will boost an economy that has grown at a steady but modest rate during the past six years.

"Trump's goal is to significantly increase America's real GDP growth rate and thereby create millions of additional new jobs and trillions of dollars of additional income and tax revenues," wrote Peter Navarro, a business professor at the University of California-Irvine, and Wilbur Ross, whom Trump has nominated as secretary of the U.S. Department of Commerce.

But a number of economists fear that because Trump's plans do not restrain growth in Social Security and Medicare costs, the result will be unthinkable annual deficits and eventually slower economic growth, higher interest rates and only modest wage increases.

The nonpartisan Congressional Budget Office projects that, without a change in economic policy, the government would add $9 trillion during the next decade to the debt, which is made up of Treasury bills, notes and bonds sold to public and private investors, including those abroad.

The Washington-based Committee for a Responsible Federal Budget calculates that Trump's economic plans would pile on $6 trillion in debt beyond that $9 trillion increase during the next decade. As a percentage of gross domestic product, that would rival the record debt load in the aftermath of World War II.

"On net, all the policies he has proposed move in the wrong direction on debt," said Marc Goldwein, head of policy at the committee.

"It's not to say if we don't act tomorrow, the economy will melt down," Goldwein said. "It's more like termites in your house. The house won't collapse overnight, but its integrity will weaken."

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a Washington organization that deals with trade and budgets, said, "We want government to take care of our health and our pensions and military retirees and do something for child care. We want all those kind of things. On the other hand, we are not willing as a nation to pay for it."

Others point out that the Federal Reserve Board perceived the economy as healthy enough this month to withstand an increase in a key short-term interest rate. Federal Reserve Chairwoman Janet Yellen recently predicted that the "economy will continue to perform well," pointedly adding, " fiscal policy is not obviously needed to provide stimulus to help us get back to full employment."

Trump's plans are a dose of President Ronald Reagan's tax cuts in the 1980s blended with a dash of President William McKinley's protectionism from the 1890s. His advisers say a combination of cutting taxes, eliminating the trade deficit, curbing federal regulations and unleashing energy exploration will add $2.37 trillion in tax revenue to the federal treasury during the next decade.

Trump has called for cutting the corporate tax rate from 35 percent to 15 percent. He has endorsed a House Republican plan to consolidate the current seven income-tax brackets to three, reducing the top rate of 39.6 percent for the wealthiest Americans to 33 percent.

Although calculations by independent organizations such as the Tax Foundation in Washington suggest that tax reductions backed by Trump and GOP lawmakers would sharply reduce federal revenue, other are less certain. John D. Graham, dean of the School of Public and Environmental Affairs at Indiana University, said in an email that "the boost in revenue from a larger tax base and growing economy should be larger than estimated here."

But the past two times the government slashed taxes, in 1981 and 2001, tax revenue did not keep pace with federal spending, causing deficits to continue to rise.

Trump's advisers suggest that any revenue loss will be offset by eliminating the trade deficit, to be achieved by importing fewer goods and exporting more. They say that if more goods are produced in the United States than abroad, American companies will have larger profits and hire more workers, who will pay more taxes.

"If America's trading partners continue to cheat, a President Trump will use all available means ... including tariffs," Navarro and Ross wrote in their analysis, released in September. They acknowledged that tariffs -- taxes on imports that increase the price of the product to American consumers -- "will be used not as an end game, but rather as a negotiating tool to encourage our trading partners to cease cheating."

But Marcus Noland, executive vice president and director of studies at the Peterson Institute, wrote that the plan is "the type of magical thinking best reserved for fictional realities."

And, without reform, federal spending on Social Security, Medicare, Medicaid and interest -- which combined consume more than 60 percent of the budget -- will keep rising.

The Committee for a Responsible Federal Budget said the government spends more today on interest payments than on education, housing and transportation combined, and that by 2023, interest payments will exceed the federal cost of Medicaid, which provides health coverage for the poor.

"Nobody wants to be the bearer of bad news," said Goldwein. "I'm scaring people because it is scary."