We all like tax breaks, but fiscal responsibility requires more than just cutting taxes. Nothing shows that more than the budget implications of the fiscal policies of the two leading candidates for president.
With the party conventions nearing, it's time to start thinking about the financial realities of the Donald Trump and Hillary Clinton economic proposals. Of course, the Republican is the fiscally responsible one while the Democrat will cause the deficit to soar, right?
Not in this year of unpredictable politics.
I often say there is no such thing as a free tax cut, and when it comes to Trump's economic plan, that is oh, so true. The "nonpartisan, nonprofit" Committee for a Responsible Federal Budget makes that argument in its new report, titled "Promises and Price Tags: A Fiscal Guide to the 2016 Election."
The CRFB estimates that Trump's proposals could swell the national debt by $11.5 trillion over 10 years. That's in addition to the $10 trillion increase projected given current policies and expected growth rates. Very simply, Trump's economic plan more than doubles the projected increase in the debt.
Why is Trump's plan so debt-laden? It's all about the tax cuts. According to the CRFB report, "his plan would cut net taxes by $10.5 trillion over a decade. He would also reduce non-interest spending by about $650 billion, but interest costs would increase due to higher debt levels, and thus net spending would rise by over $1 trillion over a decade."
In lay terms, he loses a vast amount of revenue because of his tax cuts but doesn't come close to making that up with spending reductions. Worse, the added interest expenses from the higher debt exceed the cutbacks in spending.
For Trump to actually pay for his tax changes, he would have to reduce spending by 22 percent. If Social Security and Medicare were exempted, the rest of the budget would have to be cut by nearly 40 percent. That's not going to happen.
Well, couldn't we simply grow out of a Trump deficit?
Not likely. The CRFB estimates that the economy would have to expand by 4.6 percent annually for Trump's proposal to pay for itself. That's twice as fast as most economists believe the economy can grow over a sustained period. In other words, there is no such thing as a free tax cut, unless you think soaring national debt is a good thing.
What about the Clinton plan? It's not surprising that Clinton is proposing to increase spending. She wants to expand outlays by about $1.45 trillion over a 10-year period, compared with Trump's $650 billion reduction. However, the increase in debt created by the Clinton proposals is just $250 billion, nowhere near Trump's expected $11.5 trillion revenue shortfall.
Given that spending should total about $52 trillion over that 10-year period, the Clinton shortage is pretty much a rounding error.
Clinton pulls off this financial miracle the old- fashioned way: She pays for her added spending on education, infrastructure, and health care by raising taxes. Her increases fall largely on upper-income households and businesses and would collect an additional $1.2 trillion in revenues.
It is interesting that Clinton could actually pay for her entire spending program if she cut non-Social Security or Medicare programs by less than 1 percent. That's a lot less than the nearly 40 percent in spending cuts that Trump's plan would require.
It is also not unreasonable to think that the Clinton plan would pay for itself. An annual growth rate of 2.3 percent would be needed, well below the 4.6 percent growth rate required under the Trump proposal. The CRFB uses a 2.2 percent trend growth rate as the baseline for its estimates, so growth would have to be just a little faster than that for the Clinton plan to be revenue neutral.
The current economic plans of Clinton and Trump will likely change as the pressures of campaigning cause the candidates to make additional proposals to attract voters.
But as they now stand, when you cut taxes and don't balance them with spending cuts, as Trump proposes, the result is as expected: a much wider deficit. Meanwhile, to keep the deficit under control, if you increase spending, you'd better increase taxes, which is precisely what Clinton proposes.
The options are clear: lower taxes but ballooning debt, or more spending, higher taxes for some, but greater fiscal responsibility. The choice is yours.