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Making “Fiscal Space” for the Trump Agenda

Monday November 21st, 2016   •   Posted by Craig Eyermann at 7:05am PST   •  

9036801 - a venn diagram of two intersecting circles, one marked what do you want and the other what can you afford, symbolizing the tough spending decisions that must be made when keeping within a financial budget In the days leading up to the November 8, 2016 elections, RealClearPolicy featured a number major policy ideas from across the ideological spectrum in the U.S. on how to manage the fiscal policy of the federal government after President Obama’s tenure in office comes to an end on January 20, 2017. The Progressive Policy Institute‘s Paul Weinstein was one of those contributors, who approached the topic from the perspective of how a victorious Hillary Clinton could achieve her costly policy agenda without racking up billions more in national debt for a federal government that has racked up too much in the previous eight years.

Many of the same considerations would most certainly apply to the costly policy agenda proposed by the actual winner of 2016’s presidential election, Donald Trump. And because that’s the case, Weinstein’s suggestions for how to carve out the “fiscal space” needed to make Hillary Clinton’s policy proposals a reality could very well be employed by President-elect Trump to do the same for his proposals once his tenure in office begins.

So when you read the following excerpt, substitute “Donald Trump” for “Hillary Clinton” or the appropriate pronoun wherever you see them used, and substitute whichever of Donald Trump’s spending priorities are of roughly equal value to those proposed by Hillary Clinton in the discussion.

Mrs. Clinton has proposed about $1.4 trillion in new initiatives. Her platform contains a number of important initiatives including a $300 billion down payment to get our roads, railways, sewers, electrical grids, and airports back in working condition; $350 billion to make community college free and help reduce student-debt burdens; $300 billion to expand paid family leave; and $200 billion to increase early childhood education and childcare.

The current administration’s playbook has been to press for new spending in the context of existing fiscal parameters: limiting cuts to the smallest part of the budget pie (discretionary spending); not linking sweeping tax reform to higher revenues; and avoiding a discussion of how to make important entitlements, such as Social Security, Medicare, and Medicaid, sustainable and more progressive. If President Clinton follows suit, her sweeping progressing agenda will likely be marginalized — or, even worse, never materialize at all.

If, on the other hand, President Clinton ties her agenda to a plan to cut the deficit and reform the tax code, she might be able to win the funding she wants and America needs….

In prior bipartisan budget deals, Republicans have demanded at least $1 in spending cuts for every $1 in additional tax revenue. Assuming a similar construct, President Clinton would need to cut total spending by 2.5 percent to stabilize the debt as a share of GDP and pay for her new initiatives. To balance the budget and fund her priorities, she would need to cut total spending by 7 percent.

Where can the money be found for these spending cuts? There are certainly some programs in the discretionary budget (spending that requires Congress to act annually) that no longer serve a purpose. But the real savings is in entitlements (spending that is on auto-pilot). This means: doubling down on the cost-savings measures in Obamacare as well as adopting some Republican ideas, including malpractice reform; saving Social Security in a way that increases benefits for low-income families and ensures adequate retirement security for all; and going after agricultural subsidies that have long outlived their usefulness.

The prospects for tax reform certainly look like the most promising starting point for the new administration — a real opportunity to find revenues to finance important investments in people and infrastructure.

If there is such a thing as “low-hanging fruit” in Washington these days, corporate tax reform is the sweetest tasting option. Both Republicans and Democrats recognize that U.S. corporate tax rates are too high. And the current U.S. system — which imposes those high rates on the foreign income of U.S.-based multinationals while deferring taxes until firms reinvest their profits at home or distribute them to shareholders — simply isn’t working.

A corporate-tax reform package that could split the difference between the Obama administration’s budget and the proposal put forth by former Republican Ways and Means chair Dave Camp would be a win for Democrats and Republicans. That proposal includes a lower statutory rate, fixes for the out-of-date and poorly interpreted transfer pricing rules, deferral of taxes on income earned overseas, income stripping using intercompany debt, and movement towards a territorial system.

The Clinton administration would also be wise to revisit the tax-reform plan put forth by the bipartisan National Commission on Fiscal Responsibility and Reform (Simpson-Bowles). Known as the “Modified Zero Plan,” this plan captured the interest of Republicans and Democrats because of its ability to lower rates dramatically, simplify the tax code, enhance fairness and progressivity, and increase government revenues for deficit reduction. Highlights of the plan included: 1) eliminating or reforming the vast majority of the special preferences and tax expenditures in the tax code; 2) creating four super tax incentives: an enhanced Earned Income Tax Credit, a universal 401k/IRA; a new mortgage-tax incentive; and a charitable-giving tax credit; 3) lower marginal tax rates for all taxpayers; 4) reducing the number of tax rates to three; and 5) taxing capital gains and dividends at ordinary income rates.

The interesting thing about Weinstein’s suggestions is that much of the dynamic he describes between a Democrat President and a Republican Congress would also apply between a President Donald Trump and a more fiscally conservative Republican Congress because of Trump’s position as the most anti-establishment candidate of 2016, albeit with a different line up of issues. In electing Donald Trump as the U.S. President, American voters may very well have achieved the result of a divided government that can better restrain the growth of the national debt, even though the White House, Senate and House of Representatives would all nominally appear to be controlled by members the same political party.

That is because policy divisions within the Republican party between the more establishment members of the Congress and an anti-establishment Donald Trump White House could act as a brake on the kind of runaway growth of the national debt that characterized the first two years of the Obama administration, where no such political divisions existed between the White House and the Democrat party majorities that tightly controlled both houses of Congress and marched in lock step together when it came to the U.S. government’s fiscal policies during those gloomy days for fiscal restraint.

Still, even with those factional divisions within the Republican party, there may be some other unique opportunities to clear more fiscal space within the U.S. budget to support Donald Trump’s ambitious priorities than would ever have existed in a Hillary Clinton administration, and thus were not even considered by Paul Weinstein in his analysis as he assumed, like many, that Hillary Clinton was all-but-guaranteed to win the 2016 election.

More on those unexpected opportunities in the weeks ahead.

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November 2016