Yesterday, we highlighted a one-page report prepared by the Treasury Department which claimed that – in what was perhaps one of the most unrealistically optimistic budget projections to ever be produced by the US government agency - the Senate’s version of the Republican tax plan would, somehow, bolster GDP to a 2.9% real growth rate over 10 years.
The report – a transparent attempt to distract from the plan’s elimination of more than $1.5 trillion in total receipts, while emphasizing its potential pro-growth aspects – relies on a scenario where the economy achieves a baseline of 2.9% GDP growth over the coming decade, compared with the Treasury’s previous projection of 2.2%.
This additional 0.7 percentage point of annual growth, the report claims, will lead to an increase in tax revenue of $1.8 trillion. Treasury "expects approximately half of this 0.7% increase in growth to come from changes to corporate taxation, while the other half is expected to come from changes to pass-through taxation and individual tax reform, as well as from a combination of regulatory reform, infrastructure development, and welfare reform as proposed in the Administration’s Fiscal Year 2018 budget."
To transform these projections into a reality, the US economy would need to achieve the longest cycle of uninterrupted growth in US history.
Unsurprisingly, the report has elicited howls of outrage from Democratic lawmakers and academics, who blasted Treasury Secretary Steven Mnuchin – a former Goldmanite – for the obviously bogus report, as Reuters reported.
Even Mnuchin’s fellow Republicans joined in the outrage pow-wow: Case in point, the Committee for a Responsible Federal Budget, a conservative fiscal watchdog in Washington, claimed the report, which was prepared by Treasury’s Office of Tax Policy, “makes a mockery of dynamic scoring and analysis."
Meanwhile, Senate Minority leader Chuck Schumer said the Treasury analysis was “nothing more than one page of fake math."
Of course, when the next recession hits – which, if the past is any guide, should happen before the end of 2019 - the yield curve will be steeply negative, crushing the financial sector. Government tax revenues will plunge and government-borrowing will soar. In a scramble to monetize the explosion of debt before it snowballs into one of the most severe debt crises in modern history, the Fed will launch QE4 at a time when interest rates are still low by historical standards and the central bank’s swollen, post-crisis balance sheet may not yet be fully unwound.
In what was perhaps the report's most entertaining paragraph, Mnuchin & Co. engage in what could be construed as a little light-hearted trolling of the economic community.
We acknowledge that some economists predict different growth rates. OTP projects that at approximately 0.35% of incremental annual GDP growth, Treasury tax receipts would generate approximately $1 trillion of incremental revenue. Neither JCT nor Treasury has released a score showing increased tax receipts from the House plan, though we would not expect the results to be materially different.
As Reuters points out, the Wharton Business School at the University of Pennsylvania also issued a report on Monday, which found that the plan approved by the full Senate would add $1.5 trillion to the national debt over 10 years, “even with assumptions favorable to economic growth."
One week ago, in its latest assessment of the current state of tax reform in the aftermath of the Senate's passage of the tax bill, Goldman analysts calculated that, while the growth impact from tax reform would increase fractionally to around 0.3% in 2018 and 2019 "reflecting the slightly larger amount of tax cuts in the Senate plan following revisions, and our expectations regarding the eventual compromise", there would be a very modest - if any - boost to US economic growth from tax reform.
Notably, the sparring over economic forecasts came as Republicans resumed efforts to reconcile two tax-overhaul bills, one approved by the Senate and one by the House of Representatives.
Regardless of whether its projections are based on sound numbers, Republicans probably won’t hesitate to use it as a cudgel to beat back deficit hawks who are threatening to delay the tax plan by demanding that Republicans rein in cuts to stop the plan from blowing out the deficit and piling on the debt.