(Bloomberg) Donald Trump’s economic team offered more math behind his assertion that his tax cuts will mostly pay for themselves, saying trade policy would generate most of the additional wages and corporate profits that feed government revenue.
The Republican presidential nominee’s economic-policy proposals will generate $2.37 trillion in tax receipts over 10 years, according to a paper issued Monday by Peter Navarro, a business professor at the University of California at Irvine, and billionaire investor Wilbur Ross, both senior advisers to the Trump campaign. Of that total, $1.74 trillion will result from trade reforms, $487 billion from regulatory policy and $147 billion from energy, the report said.
The plan assumes that increased exports and lower imports would erase the trade deficit of about $500 billion and result in an additional $220 billion in wages and $500 billion of corporate revenue. Based on Trump’s proposed tax rates, reinvested proceeds and a multiplier effect, those gains would produce $1.74 trillion from trade, according to the paper.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office and economic policy adviser to Republican John McCain’s 2008 presidential campaign, praised Trump’s team for transparency in providing the breakdown but said the paper’s logic on trade is “wrong” and the estimates overstate the proposals’ benefits.
“The magnitudes seem too big,” said Holtz-Eakin, president of the Washington-based American Action Forum, who has previously found fault with Trump’s proposals. “I have no objection to regulatory reform—it’d be a good idea. I have no objection to tax reforms—it’d be a good idea. I come down on a different side about how trade impacts the U.S. economy. That’s fine, but it just doesn’t add up to anything that large.”
The report assumes reducing regulations would save companies at least $200 billion a year, adding that amount to profits which would then generate revenue from taxes and earnings on invested cash. Removing energy restrictions would add about $95 billion to gross domestic product annually, which would then generate taxes on wages and corporate profits, the paper said.
“The energy stuff’s just over-stated,” Holtz-Eakin said. “There’s nothing wrong with that paper that couldn’t be solved with division by 10 or 100.”
The paper by Ross and Navarro says the estimated $2.37 trillion in new revenue would mostly offset Trump’s proposed tax cuts for individuals and corporations—which the Tax Foundation, a Washington-based policy group said last week would cost $2.6 trillion.
However, the Tax Foundation’s cost estimate was based on an assumption that Trump was withdrawing one of his main tax cuts—giving income from certain businesses known as “pass-throughs” a tax rate of 15 percent. With that tax cut included, the plan’s cost might be as high as $3.9 trillion, the tax-policy group estimated.
Pass-through businesses, which include partnerships and limited liability companies, don’t pay taxes themselves under current law; they pass their income along to their owners, who then pay tax at their individual rates. Trump’s campaign initially proposed taxing that income at 15 percent, though his aims are less clear in the latest version of his plan.
Bill Hoagland, a senior vice president at the Washington-based Bipartisan Policy Center and a former budget staffer on Capitol Hill, noted that the report still concedes a widening of the fiscal deficit, with revenue insufficiently funding the proposed tax cuts.
Hoagland also warned that the Trump-proposed “defensive tariffs” would have significant negative consequences that are unaccounted for in the report.
“The least worst of that is it could be inflationary, and the worst of it would be that I think that’d cause a trade war,” Hoagland said. “And the very worst of it is that most economists would agree that you’re looking at a global economic recession as a result.”
—With assistance from Lynnley Browning
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