Steve Mnuchin Can’t Stop Lying About Trump’s Theoretical Tax Reform Plan

By Eric Harris Bernstein |

Well, 4/20 came and went, and it seems we have evidence that at least one member of the Trump administration celebrated the holiday. That’s the innocent explanation, anyway. Last week, during remarks at an event hosted by the Institute of International Finance, Treasury Secretary Steven Mnuchin tacked yet another indefensible, empty promise onto the administration’s mystery tax reform plan: Now, in addition to providing no net benefit to the wealthy, the plan will “pay for itself with growth.”

In one of his best lines ever, my colleague Mike Konzcal said, of the possibility of progress under Trump, “The actual bereaved will have better luck bargaining their grief, that God will raise their dead loved ones.” I would like to apply a similar sentiment to the likelihood that Trump’s tax reform plans will approach anything near neutrality with respect to either gains to upper-income households or revenue overall. Never. Gonna. Happen.

First of all, the notion of a Republican tax cut that does not return money to the wealthy is patently absurd; conservative tax reform endeavors to do nothing else. Under the last Republican tax plan, median households were slated to take home an additional $260 per year, while households in the top 20 and top 1 percent were set to net roughly $12,000 and $212,000 a year, respectively. Neutralizing these cuts would have rendered the plan largely meaningless and would constitute a break with the decades-long Republican Party obsession with supply side tax cuts—a reversal that is nowhere to be found in Trump’s anti-tax rhetoric.

Let us ask ourselves which is more likely: that the Trump administration has reversed 40 years of Republican ideology and now intends to rewrite the tax code to benefit the middle class, or that the Trump administration is lying?

So, then, what is Mnuchin thinking by making a promise like this? Well, he’s thinking he can get away with it. Namely, the Trump administration will rely on dynamic scoring and misleading analysis to deny the revenue loss and distributional impact of their plan. I will discuss these smoke-and-mirror strategies in more detail shortly, but first, let’s establish that there is absolutely no way that any conservative tax reform plan will honestly meet the criteria Mnuchin has laid out.

Using the Brady-Ryan plan as a baseline, we observe a distribution so top-heavy that there is almost no way to counteract the gains of the upper percentiles. Over 75 percent of that plan’s $3 trillion 10-year cost would have gone to the top 1 percent alone, with nearly 90 percent going to the top 20. Making the plan “Mnuchin-compliant,” then, would mean erasing well over $2.5 trillion in gains to the wealthiest Americans. According to estimates by the CBO, cutting the deductibility of all charitable contributions would do less than a quarter of that job. Add to this the elimination of the entire mortgage interest deduction and the Trump administration would be just over halfway there. So, after eliminating the fourth and fifth largest expenditures—darlings of key constituencies, both—Trump and co. would only have to scrounge together another $800 billion or so from the top 20 percent in order to come through on their promise that the plan would not benefit the wealthy.

Note: Since this was written, it emerged that Donald Trump has proposed cutting the corporate tax rate to 15 percent. That would make the gains for the top 20 and 1 percent substantially larger than in the example outlined here. 

On the growth front, the Tax Policy Center estimates that tax-cut-inspired growth could generate anywhere from $100–$600 billion in revenue gains over 10 years. Optimistically, that would leave the Trump administration a $2.5 trillion revenue shortfall to make up for. Even the conservative Tax Foundation—a stalwart of Republican optimism on all things revenue-negative—couldn’t tinker enough to make the plan revenue-neutral in economic models; after extensive mathematical gymnastics, their score still came up $200 billion short over the first 10 years. What’s more, both of these analyses ignore the fact that the largest revenue raiser conservatives have put forward, a border adjustment (effectively a tariff on all imports) of 20 percent, appears dead on arrival. That means Trump’s tax team is likely wrestling behind-the-scenes with an additional $1.18 trillion in missing revenue on top of the $2.5 trillion it already can’t answer for.

To be fair, though, that was the old plan. If the new plan is something more like what the Trump camp drew up during the election (the second, more down-to-earth plan, that is), then ensuring no net boon to the top 20 percent and no loss of revenue would be easier becau— No, wait, sorry. Under that plan the loss of revenue and benefit to the top 20 percent are actually double those set out by the already-outlandish House GOP plan. So much for that.

Now that we’ve ruled out honesty, let’s dive into how Trump will defend the indefensible.

First, he will rely on his in-house Council of Economic Advisors and the conservative think tank community to produce growth projections that eliminate the plan’s 10-year revenue loss. This economic sorcery, known as dynamic scoring, is the economic equivalent of your bratty cousin trying to convince you that swishes are worth three, and it has already begun.

The Tax Foundation predicts that Brady-Ryan would result in nearly a full percentage point of additional GDP growth per year—a 47 percent improvement on the CBO’s baseline prediction. For context, the economy has not grown at such a rate for a single year since before the Great Recession. To get there suddenly for even a year, let alone sustain that growth for a decade, seems like a stretch. Even going by the Tax Foundation’s own questionable calculations, that would rank the Trump cuts as the most impactful of all time, besting even Reagan’s 1981 overhaul by 12.5 percent. That is a lot of faith to put in top-heavy tax cuts, which have never succeeded in boosting long-term growth before.

All of this is to say that tax reform will likely provide the next battleground for Trump’s war on independent analysis, which was initially launched when the CBO logically predicted that repealing Obamacare would result in massive coverage losses. The CEA has already fudged the numbers for Trump once, scoring his budget based on assumed 3.2 percent growth, and soon it will be called on to do it again. Likewise, the Trump administration has already criticized the CBO for hostile analysis once, and you can rest assured that it will do so again soon.

Beyond that, to the extent that the White House feels the need to provide more supporting analysis, it can silo the plan’s discrete components, highlighting the neutrality of certain pieces and ignoring the loss of progressive revenue from others. The key here is that income tax cuts—what most people think of when they think of “taxes”—are just a small part of most of the conservative tax reform proposals we have seen over the last several years. Brady-Ryan, for example, was roughly neutral with regard to income taxes (because this was the area where the plan’s revenue-raising offsets, such as repealing itemized deductions, were concentrated) but, as noted above, still ultimately represented net revenue loss of over $3 trillion, most of which went to the top 1 percent.

The difference came from corporate, capital, and business income tax cuts, which many Americans might consider as a separate issue, more related to growth and increasing productive investment. The problem is that this narrative is false, as Marshall Steinbaum and I discuss at length in our recent paper “Fool Me Once.” In reality, research shows that corporate income is the income of the 1 percent, and this is why we must tax it at higher rather than lower rates.

In an honest world, this would be enough to expose Mnuchin’s false promises. But ignoring the distributional effects of corporate and capital tax cuts while highlighting the neutrality with respect to income taxes might provide enough analytical cover for the administration to avoid the worst political body-blows. Put simply, the American public is unlikely to demand a credible estimate of the incidence and distribution of corporate tax cuts if presented with a compelling case that, while wealthy Americans’ income taxes were lowered, they are still paying the same overall percentage they used to.

Sure, Sean Spicer may look foolish defending the plan in press conferences, and yes, Steve Mnuchin will need a massive amount of concealer to hide the conspicuous growth of his nose, but these are terms the Trump administration seems willing to tolerate.

Also published on Medium.

Eric Harris Bernstein is a Program Manager at the Roosevelt Institute. Follow him on Twitter @erichbernstein.