The CBO fails to understand economic growth lowers debt

The CBO fails to understand economic growth lowers debt
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The latest Congressional Budget Office report has emboldened Donald Trump’s critics. “Aha,” they say. “The tax cuts are blowing a $2 trillion hole in the budget. We are looking at $1 trillion annual deficits for as far as the eye can see.” But what isn’t said is that these gloomy numbers are hardly different from what President TrumpDonald John TrumpHouse Republican threatens to push for Rosenstein impeachment unless he testifies Judge suggests Trump’s tweet about Stormy Daniels was ‘hyperbole’ not defamation Rosenstein faces Trump showdown MORE inherited from President Obama 18 months ago. Back then, the CBO predicted $1 trillion deficits every year, and the debt headed to 150 percent of GDP by the 2030s. Obama ran up deficits in his first term much larger than any deficit Trump is expected to record in his first term.

The CBO says that the new budget passed by Congress and signed into law by Trump, which we agree spends way too much money, in combination with the pro-growth tax cut Trump signed into law in December, has made a gloomy long-term budget picture worse. To quote Upton Sinclair, “It’s hard to get a man to understand something when his livelihood depends on his not understanding it.”

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The CBO needs deficits and economic malaise to justify its existence. As such, the CBO refuses to believe that faster growth is humanly possible. One of the major flaws in the CBO’s model, is that it fails to account for the decreased sheltering of income that occurs when taxes are cut. A lower tax rate means that there will be less sheltering on the margin because it will be cheaper to pay the tax than it will be to pay those lawyers, accountants and deferred income specialists.

Then there is tax evasion, inversions, and state and local tax revenues, all of which respond to tax rates and will reduce deficits. These effects can be enormous. The fact that the CBO does not account for them in its model is a sign that it is greatly underestimating the long-run growth of tax revenues. Most importantly, the only feasible way to get the debt and deficits under control is much faster economic growth.

The whole premise of “Trumponomics” is to get the economy on a growth path of at least 3 percent to avoid the very bleak fiscal future the CBO predicts. The tax cuts, especially the marginal income tax rate cuts for workers, small businesses and corporations, in combination with Trump’s regulatory relief, pro-America energy policies, and health and welfare reforms can speed us up to 3 percent growth.

The CBO agrees that this year’s growth will be close to 3.5 percent, but they also see slower growth thereafter and only 1.9 percent growth over the long run. This is actually a slightly upward revision from the 1.8 percent predicted last year. It’s an improvement over the anemic 1.6 percent growth rate Trump inherited from Obama.

Most economists who supported Obama’s “tax, spend, borrow” policies have made it clear they believe 3 percent growth is impossible. Larry Summers says first and foremost that 2 percent long term growth is an optimistic “new normal” for the United States as we enter an era of “secular stagnation.”

But guess what? Trump has only been in office for four full quarters and already he has ratcheted up actual growth to just shy of 3 percent for the past 12 months, and the tax cuts have only now started to kick in. Obama in eight years never got to 3 percent. Trump has clearly ramped up growth. As he said recently, “We’re just getting started.”

Yet, the CBO’s entire bogus growth and fiscal forecast is based on the belief that Trump’s policies won’t work. But they are indeed working. Every economic indicator — the jobs reports, the stock market, the small business confidence index, business investment — points straight north.

We recently recalculated the CBO forecast assuming that we do get to 3 percent growth on a sustained basis. After President Reagan’s tax cuts took effect, we had nearly 5 percent annual growth, and Trump has done even on the deregulation front. The long-term growth rate of the U.S. economy for the past century, which includes good times and very bad times, is still 3.3 percent. We are not shooting for the moon here.

With 3 percent real GDP growth, instead of the debt trend getting worse every year, it will get better. With 1.9 percent annual growth, we will have an economy that reaches roughly $30 trillion by 2040. But with 3 percent growth, the economy grows to just shy of $38 trillion. Over just 10 years, a 3 percent growth rate expands the economy and spins off $3 trillion more annual tax revenues and spending reductions. That’s nearly the entire annual GDP of Michigan, Ohio and Indiana combined.

Yes, the debt would still go up. But because the economy would be growing faster than the debt, the share of GDP that is debt would fall and fall over time. That’s what we want. Meanwhile, Democrats want to repeal the business tax cuts and the income tax rate cuts. Does any sane person believe that raising taxes on job creators will make the American economy more prosperous?

We have already seen the positive early effects of the Trump tax cuts. Hundreds of billions of dollars reinvested in the United States. Some five million workers have received bonuses and pay raises. Walmart and Costco have raised their minimum wages. The investment rate by businesses is way up. All of that sounds like a formula for more growth and lower debt in the long term.

‎Arthur Laffer is president of Laffer Associates. Stephen Moore is a distinguished visiting fellow at the Heritage Foundation and former economic adviser to Donald Trump’s 2016 presidential campaign. The authors are co-founders of the Committee to Unleash Prosperity.