Lawrence Summers called Donald Trump’s first Budget “ludicrous”. It makes extravagant assumptions of high GDP growth for a decade. It also makes the elementary mistake of double-counting. Mr Trump proposes to cut tax rates and to make spending cuts.
The spending cuts are assumed to lead to a $3.6-trillion reduction in federal expenditure over a decade. The tax cuts will supposedly stimulate activity, leading to annual GDP growth of three per cent. The growth acceleration will, despite reduced tax rates, garner an extra $2 trillion in tax revenues over the decade. Hence, the federal deficit will be reduced by $5.6 trillion, if all assumptions are correct.
The tax cuts are “deficit-neutral” meaning that there will be no reduction in revenue collection — higher growth will lead to higher revenue. If you think that’s saying the same thing twice, here and above, you’re more observant than Mr Trump’s policy wonks. This is the double-counting. If tax cuts are “deficit-neutral”, extra revenue from higher growth balances off cuts in tax rates. But that extra revenue cannot be counted all over again in deficit reduction.
via Govts fudging data; making unrealistic policy assumptions | Business Standard Column
aniltikotekar4sme.com 