E Will Trump’s Tax Policies Result In Higher Budget And Trade Deficits? Yes

President Trump has promised to cut federal taxes and reduce the U.S. trade deficits with other countries. Unfortunately for Trump, both history and economic theory suggest that these priorities are completely inconsistent.

The Administration has claimed that its $1.5 trillion tax cut without offsetting expenditure cuts will not balloon the federal budget deficit. The supply side economics argument is that the tax cuts will generate increased economic growth which will essentially pay for the tax cuts.   

These are of course supply side views which Republicans hold dearly. In fact, the previous three Republican presidencies (Reagan, G.H.W. Bush and G.W. Bush) all attempted versions of this approach with only minimal impacts on economic growth and employment, but significantly higher budget deficits.

As the following chart illustrates, the weak results for U.S. economic growth were not surprising, since the fiscal multipliers associated with tax cuts for corporations and wealthy individuals are quite low.

According to latest projections from the non-partisan Congressional Budget Office (CBO), Republican President Trump’s supply side tax cuts won’t produce different results.

The National Bank’s Hot Charts (Nov. 9, 2017) shows that if the recent Republican tax proposal is voted into law and there is no recession over the forecast horizon, the U.S. budget deficit will soar to a massive US $1.7 trillion or 6% of GDP by 2027.