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Clinton, Trump, and Budget-Busting Tax Cuts

By       Message Dean Baker       (Page 1 of 2 pages)     Permalink    (# of views)   2 comments

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Reprinted from Huffington Post

Hillary Clinton and Donald Trump
Hillary Clinton and Donald Trump
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At the Democratic convention we got some insights into the Clinton campaign's line of attack on Donald Trump. While they rightfully intend to confront his racism, sexism, and xenophobia, the Clinton campaign also seems prepared to attack Trump's "budget-busting" tax cuts. This is an area where caution would be advised.

The basic story is that, in the usual Republican tradition, Trump wants to give huge tax cuts targeted primarily to the wealthy. According to calculations from the Tax Policy Center of the Urban Institute and the Brookings Institution, these tax cuts will cost $9.5 trillion in lost revenue over the next decade before accounting for interest.

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Of course $9.5 trillion is a REALLY BIG NUMBER, and you can often scare people with really big numbers. But if we want to be serious about matters, we need to put this number in some context. The Congressional Budget Office projects that over the next decade, GDP will be roughly $240 trillion. That means that the amount of revenue lost due to Donald Trump's tax cuts plan will be just under 4.0 percent of GDP. Given that we now spend 3.5 percent of GDP on the military, this is real money.

But before we join the "budget-buster" chorus, it is worth remembering that the economy is suffering from a serious shortfall of demand. This is the concept of "secular stagnation" that is now being embraced by many of the world's most prominent economists. Before the 2008 recession, most economists did not take seriously the idea that the economy could suffer from a sustained shortfall in demand.

But in the years since the downturn, economists such as Paul Krugman, Larry Summers, and Olivier Blanchard, the former chief economist at the International Monetary Fund, have all raised concerns about secular stagnation. This means that they believe the economy needs additional spending in order to boost demand and employment and bring the economy's level of output back towards its potential.

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In this context, a proposal to have a big tax cut actually could make a great deal of sense. It would put more money in people's pockets, which they could then spend. This increase in demand will lead companies to increase output and employment.

This doesn't mean Trump's tax cut is the best way to boost demand in the economy. First, the bulk of the tax cut goes to the people at the top of the income ladder. These are the people who already are doing very well. It seems more than a bit odd to be giving them a huge tax cut to make them still richer.

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)

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