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One thing economists hate about Trump’s tax plan

Since Election Day, stocks have risen more than 10%, in large part because of hope President Trump will cut taxes and boost profits. But on the day Trump actually unveiled his tax-cut plan, investors yawned.

Wall Street analysts, in fact, were unimpressed with Trump’s one-page tax-cut blueprint and a briefing by top White House advisers that added few additional details. Morgan Stanley called the plan an “opening statement” and said it “does not reduce risk of delay; provide key content details [or] outline a credible bipartisan path.” The bank warned its clients to prepare for “fiscal disappointment.”

One element of Trump’s plan in particular irks many economists—the belief that tax cuts will stimulate economic growth so much that it’s okay to add trillions to the national debt, in the short term. This is the old supply-side argument, popularized in the 1980s, that tax cuts trigger a chain of economic events that ultimately produce more tax revenue, not less.

Facts have never validated the theory. “We can point to seven decades of history to show such naked supply side policies have consistently fallen short of those objectives,” economist Bernard Baumohl of the Economic Outlook Group wrote in an analysis. “The dogma lives on: Slash taxes and restore the invisible hand and a rip tide follows that will lift all boats. It is an idea that is profoundly simplistic and ultimately without merit.”

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Trump did offer up one measure that would bring in some additional federal revenue, to help offset the huge loss of revenue that would come with the sharp cut in corporate tax he plans, with similar cuts for individuals. He’s willing to eliminate the federal deduction for state and local taxes, known as the SALT deduction, which currently costs Washington about $100 billion per year. But that’s a drop in the bucket compared with the revenue that could be lost to the Trump plan, which early estimates place between $500 billion and $700 billion per year. So that one measure alone would still leave a gaping hole, on net, in federal finances.

Trump’s aides echo their boss’s claim that all will be well, since economic growth will boom once the cuts go into effect. “This will pay for itself with growth and with the reduction of different deductions and closing loopholes,” Treasury Secretary Steven Mnuchin said at the White House briefing introducing the plan. “The economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.”

Not so, economists say. Republican economist Douglas Holtz-Eakin, former director of the Congressional Budget Office, calls this notion a “convenient fantasy” and says the Trump plan “would create large and permanent deficits.” When George W. Bush cut taxes in 2001 and 2003, there was no big boost in growth or federal tax revenue; instead, the national debt simply rose. Most economists agree that the best way to foment growth is with the lowest possible tax rates needed to finance government. And they generally consider modest government borrowing okay. But resistance stiffens when conservative policymakers push for borrowing—rather than spending cuts—as a way to finance tax cuts. Many studies have found that there’s no meaningful correlation between tax cuts and economic growth.

Trump’s plan will undoubtedly undergo many changes as lawmakers craft the one-page outline into legislation. There will be detailed analysis of how much various versions of the plan will add to the national debt, which is already $20 trillion. Some economists already believe that tax cuts could backfire by driving up interest rates, which would raise federal borrowing costs and make the national debt even worse.

Wall Street, for its part, expects tax cuts, in the end, that are much more modest than what Trump is proposing, and take longer to enact. “The administration claims that its plan would pay for itself through stronger economic growth,” UBS analysts wrote of the Trump plan. “In our view, this is not realistic, and Congress is unlikely to pass any plan that greatly expands the budget deficit.” Like other analysts, the UBS team thinks it’s possible Congress will cut the corporate tax rate from the current level of 35% to 25% or so—but not to 15%, as Trump wants. The Trump rally, it seems, has morphed into the Trump discount.

Confidential tip line: rickjnewman@yahoo.com

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.