The middle class will see a big tax cut, but the wealthy will not. American businesses will pay much lower taxes, and as a consequence bring back billions of dollars from overseas. All this will create sustained growth of 3 to 4 percent a year and prevent the budget deficit from exploding.
That is the economic future described on Wednesday by the people President-elect Donald J. Trump has chosen to lead the Treasury and Commerce departments, Steven Mnuchin and Wilbur Ross.
But in making those bold promises, the two men have contradicted some of Trump’s campaign pledges, promised economic growth targets that will be difficult to achieve given modern demographics, and committed to plans that even sympathetic analysts project will vastly widen the budget deficit.
The comments shed light on how two men tapped as top economic policymakers in the Trump administration view their job ahead — but also expose what will be challenging about getting campaign goals accomplished.
“Any reductions we have in upper income taxes will be offset by less deductions so that there will be no absolute tax cut for the upper class,” Mnuchin said in an interview with CNBC on Wednesday morning. “There will be a big tax cut for the middle class, but any tax cuts we have for the upper class will be offset by less deductions that pay for it.”
That is not what independent analysts concluded after analyzing the tax proposal Trump made during his campaign, which would reduce the income tax rate on the wealthiest families from its current 39.6 percent to 33 percent.
In that plan, middle-class families would see a 0.8 percent increase in their after-tax income, according to an analysis by the Tax Foundation, while the top 1 percent of taxpayers would see a 10.2 to 16 percent gain. Another group, the Tax Policy Center, calculated middle-class families would get a 1.8 percent boost in after-tax income, while the top 0.1 percent of earners would see a 14 percent gain and a tax cut worth an average of $1.1 million.
But Mnuchin was talking big: “This will be the largest tax change since Reagan.”
Mnuchin suggested closing some tax loopholes would counter the effect of lower tax rates for the rich, but he mentioned only one: a cap on the mortgage interest deduction. Tax reformers have long suggested that mortgage payments should either no longer be deductible or be capped for mansions and second homes. Trump’s Treasury pick did not clarify what he meant.
It was not clear whether the comments on Wednesday represented a shift in Trump’s tax policy intentions or political spin.
“What he described there doesn’t match the plan unveiled in September,” said Alan Cole, an economist at the Tax Foundation. “This statement could be a legitimate pivot, or it could be hand waving. I don’t know which.”
One promise of Mnuchin’s that matched Trump’s was a 15 percent corporate income tax rate, a huge cut from the current 35 percent. Leaders in both parties favor a lower corporate rate, paid for with a simpler tax code with far fewer deductions and dodges. But former Treasury Secretary Timothy F. Geithner could get the rate down only to 28 percent when he ran the numbers. Even House Republicans have aimed for 25 percent.
“We’re going to cut corporate taxes, which will bring huge amounts of jobs back to the United States. We’re going to get to 15 percent, and we’re going to bring a lot of cash back to the U.S.,” Mnuchin said.
Mnuchin and Ross suggested that the plans would not widen the budget deficit thanks to “dynamic scoring,” or forecasts that assume tax cuts will release much faster economic growth and therefore pay for themselves.
But the Trump tax cuts would need to unleash far faster growth than the historical record suggests is likely to avoid rapidly increasing the budget deficit. The Tax Foundation’s analysis of the September Trump campaign plan found that even with dynamic scoring, the plan would reduce federal revenue by $2.6 trillion to $3.9 trillion during the next decade, which absent spending cuts would enlarge the deficit by up to one-third over levels the Congressional Budget Office projects.
And the Trump nominees stuck with a bullish forecast for long-term growth. “Our No. 1 priority is going to be the economy, get back to 3 to 4 percent growth,” Mnuchin told reporters gathered at Trump Tower in Manhattan on Wednesday. “We believe that’s very sustainable.”
It is true that economic growth averaged around 3.5 percent a year in the second half of the 20th century, before falling to around 2 percent a year in the last 15 years.
In trying to achieve that goal, though, the Trump administration will face significant demographic headwinds.
The speedy growth of the last century was helped along by the enormous baby boom generation entering the workforce, and more women joining the ranks of the working. Now, the baby boom is retiring and the proportion of women working is stable.
For those reasons, the Congressional Budget Office projects that the U.S. labor force will grow by 0.6 percent a year during the next decade. By contrast, from 1949 to 2000 it rose by an average of 1.7 percent a year.
Another complication to the Trump team’s predictions? Trump has promised tight controls on immigration, the one lever that could increase workforce growth.
To achieve the economic strength that the Trump administration is aiming for, either something will need to change existing demographic trends, such as higher immigration levels or would-be retirees working longer, or American businesses will need to find ways to become sharply more productive than they have been in recent years.
In other words, as the Trump economic team forms and tries to turn bold campaign promises into policy reality, it may find that the biggest limit of all is economic math.