President Donald Trump and Republicans have a big maths problem with their attempt to overhaul the nation’s tax code.
According to analysis of the tax reform framework released Wednesday by Trump and the “Big Six” tax negotiators, decreased tax rates in the plan would plunge the amount of revenue the federal government takes in by $US5.8 trillion over 10 years.
If various personal deductions were eliminated as the plan proposes, it would still leave a $US2.2 trillion addition to the deficit over 10 years, according to the analysis from the Committee for a Responsible Federal Budget.
That could be a problem for Republicans, whose soon-to-be-released budget only calls for the tax plan to add $US1.5 trillion to the federal deficit.
So to pass the tax plan using the budget reconciliation process, which allows the GOP to avoid a Democratic filibuster in the Senate, the plan has to fit in that $US1.5 trillion hole.
“The Big Six 6 tax release was big on cuts and short on specific ‘pay fors,'” said a note from Morgan Stanley following the bill’s release. “Some estimates of today’s plan indicate that there are about $US5 trillion in proposed cuts that Republicans need to fit into a $US1.5 trillion box (the amount of 10-year deficits agreed to in a tentative deal in the Senate Budget Committee.”
That means the plan released Wednesday will likely have to change substantially in order to make the maths work, analysts say.
One option would be to further eliminate deductions to squeeze another $US700 billion in additional tax revenues into the plan. Brian Gardner, an analyst at financial services research firm KBW, said that would be incredibly difficult.
“The short answer is, yes, it is going to be hard to find offsets and many proposals will meet stiff resistance from interest groups but we don’t know the exact level of difficulty,” Gardner told Business Insider.
Chris Krueger, an analyst at Cowen Washington Research Group, was even more blunt.
“$US3.5 trillion in offsets? Yeah, that is never going to happen,” Krueger said in an email. “I think people forget that failure is an option in Washington.”
Another option could be increasing tax rates in the plan, which would also allow for more revenue. Gregory Valliere, chief strategist at Horizon Investments, said this would end up being the most likely path.
“Dollar amount is way over the limit so many of these proposals will have to be scaled back,” Valliere told Business Insider. “Tax cuts for wealthy will be among the first to go — top rate may stay close to 39.6%. Top corporate rate may not get to 20%. Today’s document simply starts the negotiations.”
Another option would be to simply change the budget rules.
“I think there’s a lot about the budget parameters that we don’t know and which make it difficult to figure out,” Gardner said in an email to Business Insider.”There is a debate over whether to use current law vs. current policy as the baseline as well as the dynamic/static scoring debate.”
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