The Inter-Related Economic Impacts of Trump’s and the Congressional Republicans’ Proposals

By Andy Winnick

The various economic proposals that Trump and his Congressional friends are floating are not just a willy-nilly collection of ideas:  they are connected and are expressions of a specific ideological perspective.  This piece surveys those matters  individually and collectively.

We have all read extensive, detailed articles about the many specific impacts on particular programs or groups. I don’t wish to repeat that here. Rather, I want to take a broader view of the way the proposals in these different areas are very inter-related, how they impact each other. I want to help us come to an understanding that these inter-active effects are not just unplanned happenings, but part of an overall ideological vision of (a) reducing the role of the Federal government no matter how detrimental that is to particular groups or classes of Americans and (b) redistributing income and wealth from middle and lower income families to the wealthiest among us.

Let’s start with Healthcare, then the proposed Federal Tax “Reforms”, then address the Federal Budget Expenditure proposals, and finally turn to the Debt Ceiling issue.  Then we will close with a few words about the proposed changes in the Dodd-Frank law.

HEALTHCARE AND HEALTH INSURANCE

First of all, with regard to the Senate healthcare proposal, the key economic point is that the Affordable Care Act (the ACA or Obamacare) was designed to be totally paid for with new earmarked taxes, including a 3.8% tax on the investment earnings of families receiving over $250,000 and an additional 0.9% income tax earmarked for the expansion of Medicaid imposed on the same wealthy families. There were also taxes on health insurance firms, medical devices producers and sun tanning studios.  The essential, core purpose of both the House and Senate healthcare proposals is to totally eliminate all of these taxes immediately-  a multi-billion dollar windfall for the wealthy and those firms, to the tune of about $60 billion a year.  These tax cuts are a central goal of Trump and the Republicans. But this loss of Federal revenue then provides political cover and an excuse to virtually require cuts in Federal expenditures on healthcare – both in Medicaid, and in what is now spent on the ACA. These cuts are designed to reduce the role of the Federal government, without regard to the impact on the well-being of families (about 22 million persons would lose their health insurance), or for that matter, of the American healthcare system itself.

Moreover, for the Republicans, these cuts in services and support have to be even larger in dollar terms than the lost federal income from cutting the taxes – because they desperately want to be able to claim that this ACA “reform and repeal” effort will also reduce the debt; that is, reduce overall federal spending. If this means millions losing their health insurance, having to pay higher premiums, co-pays, and/or deductibles, hospitals and other health providers having to raise their rates to cover the medical costs of those without health insurance, then so be it -- because the driving force is that the cuts in healthcare expenditures have to both fund the tax cuts to the wealthy and reduce overall spending. Indeed, the latest (as this is being written) version of the Senate Republican plan will, over 10 years, reduce tax revenue by about $570 billion, but reduce healthcare related Federal spending by about  $900 billion, resulting in net “savings” and potential national debt reduction of $321 billion according to the non-partisan Congressional Budget Office.  To put it bluntly, they propose to cut far deeper into Federal healthcare expenditures than they would need to in order to simply compensate for the tax cuts.  One could argue that these $100s of billions in extra cuts are quite gratuitous, until one understands that the over-arching goal is to cut back on the size of government, without regard to the well-being of the people impacted.

But Republicans are terrified that these cuts in healthcare spending will be an electoral catastrophe, especially among older voters who vote in the highest proportions.  So, virtually all of the impact of these healthcare cuts are delayed until after not just the 2018 Congressional elections, but also after the 2020 Presidential election – that is, the actual cuts in support for healthcare and health insurance will not go into effect until January 2021.  But the tax cuts for the wealthy and the corporations are to go into effect immediately, that is for the current 2017 tax period.  This will have the effect of massively reducing federal revenue starting early in 2018. This means either increasing the net federal deficit (which they are nominally opposed to doing) and/or causing the federal government to  “have to” cut back overall expenditures in other areas, especially during the coming three federal tax years to span the time until the cuts in healthcare expenditures come into play. (Of course, once these other cuts are in place, they will fight any later effort to reverse them.)

But, at the same time, Trump and the Republicans have a further problem because they plan to increase National Defense/Military expenditures by as much as $50 to 65 billion and Homeland Security and Veterans’ Services expenditures by another $10 to 25 billion (for a total of $60-90 billion), even in the face of this lost revenue.  The consequences are clear and obvious, either all non-military and non-healthcare expenditures will “have to” be cut back dramatically and immediately and/or there will have to be a major increase in deficit spending and consequently in the national debt until the impact of the cuts in Federal healthcare expenditures occur starting in 2021. This is a major reason why some conservatives and libertarians are furious, and want the cuts in healthcare expenditures to occur sooner, that is, at the same time as the taxes are cut. Moderate Republicans are quite willing to see the taxes cut immediately, but are absolutely opposed to the idea of having the reduction in the availability of health insurance and healthcare to their constituents moved up to impact sooner, and indeed they are worried about the political backlash even over the prospect of the extent of these cuts in services happening in the “out” years after 2021.

FEDERAL TAX REFORM PROPOSALS

Then to make the budget problem even worse, both Trump and Ryan propose massive changes in tax rates (beyond the elimination of the ACA taxes).  Their proposals call for the tax rate on the richest families to fall from 39.6% to 35% and there would be only 3 tax brackets, 10%, 25% and 35%. The Alternative Minimum Tax, which applies only to upper income families with large deductions would be eliminated. The Estate Tax on the wealthiest families would be eliminated. For corporations, the basic tax rate would be reduced from 35% to somewhere between 15% and 25%. The tax on the foreign earnings of corporations would be eliminated (if and when that money came into the U.S.). The only measure that is proposed to help lower income families is a modest increase in the standard deduction which would keep their income tax rate at 0% until they earn about $24,000 or more, depending on family size. The combined effect of all these cuts would be the reduction of Federal government revenue by $100s of billions of dollars. 

To offset this loss of revenue, they propose to close only one loophole, the one for having paid State and Local Income Taxes  (SALT).  So far, no further cuts in corporate tax loopholes or for deductions typically taken by only upper income families have been proposed. Today, the tax loopholes used by corporations result in most of them paying not 35%, but only about 10 to 15%, and many pay no corporate income tax at all.  To make the tax reform neutral (that is, cuts in rates but no loss in revenue to the government), would require the massive closing of these loopholes, but there are absolutely no proposals by either Trump or Congressional Republicans to do this.

Trump and some conservatives had originally proposed a Border Adjustment Tax, which would impose a 20% excise tax on imported goods, and no tax on exported goods, as a way to discourage the former and encourage the latter, and to raise revenue.  Indeed, such a tax would have resulted in as much as $20 billion in revenue per year.  However, it was soon recognized that such a tax would inevitably, in most cases, be paid either by American consumers not foreign firms exporting to the U.S. or it would be paid by American firms importing parts for goods they were producing in the U.S., and then passed on to consumers.  As a result, virtually all talk of this tax has ceased.

So how is a massive increase in the deficit to be avoided if all these tax cuts were to occur, on top of the elimination of the ACA taxes?  They have two answers, (1) more pressure to cut government expenditures on everything except National Defense/Military, Homeland Security and the Veterans Services and (2) their contention that these tax cuts and the elimination of “burdensome” government regulations will result in an increase in economic growth that is so massive (more than doubling the rate of growth from under 2% to over 4%) and so quick as to generate an offset of about $2 trillion.  But virtually no economists believe this will happen.  And it is important to notice that their expressed intention is to also implement these tax cuts immediately, years before the cuts in health care expenditures are scheduled to kick in.  Again, they want the political advantages of the tax cuts coming into effect before the Nov. 2018 Congressional Elections and the Nov. 2020 Presidential elections.

FEDERAL BUDGET EXPENDITURE PROPOSALS

First it is essential to distinguish between the federal budget for the current 2017 fiscal year, which runs until Sept 30th, 2017 and the proposed budget for the 2018 Federal Fiscal year that starts on October 1, 2017.  (The Fiscal Year’s name is tied to the year in which it ends.) The current budget is already a done deal since it was passed and signed a few weeks ago (about 7 months into the current fiscal year) in order to avoid an immediate government shutdown which the Republicans could not allow to happen.  The current budget which they passed calls for a $15 billion increase for the Military and $1.5 billion more for “Border Security” than provided for the prior year. Everything else remained pretty much unchanged from the 2016 budget.

The impact of the health care tax cuts and of the other tax cuts described just above will result in lower revenues from the current 2017 (calendar) tax year, which will be felt in the Jan to April, 2018 period. So to avoid a major increase in the deficit beginning less than a year from now, the cuts in other expenditures must occur as early as possible, that is, in October 2017, the beginning of the 2018 Federal fiscal year.  This, in part, explains the imperative Republicans feel to make massive cuts in government expenditures in the up-coming budget. And, on top of that, as we said earlier, their problem is compounded by their determination to increase National Defense/Military, V.A. and Homeland Security expenditures as soon as possible, while putting off the cuts in healthcare expenditures.

With regard to the proposed budget for the upcoming 2018 Federal fiscal year, Oct 2017-Sept 2018, we have two competing models, Trump’s proposals and those of Paul Ryan in the House.  They are quite similar, but the real focus needs to be on Ryan’s plan. Both call for major increases in National Defense/Military, Veterans Services and Homeland Security expenditures to the tune of, as described earlier, $60-90 billion, with the House proposing even larger increases in military spending than Trump.  Both proposed relatively small changes in Social Security and Medicare. In the case of Social Security, they propose a tightening of qualifications for Disability payments prior to age 65, and in the case of Medicare some decreases in the rate of inflation adjustments. But the combined effect of their budget proposal is to require massive decreases in virtually all other areas, if a dramatic increase in the deficit is to be avoided. 

If one excludes cuts in Social Security and Medicare and if one proposes increases for the National Defense/Military, Veterans and Homeland Security programs, and if one allows for the required interest payments on the National Debt, what is left amounts to only about 31% of the overall budget, and almost half (46%) of that 31% is Medicaid and related health programs. So if cuts in Medicaid are ruled out for the next 2 to 3 fiscal years, that leaves less than 18% of the budgeted expenditures subject to absorbing all of the cuts.

It is important to understand that Federal expenditures fall into two parts, those which are Mandatory, that is, are required by current law, and those which are Discretionary, that is, are set each year by legislative action. The Mandatory portion, which includes – Social Security, Medicare, Medicaid, and the other “entitlement” programs: such as unemployment insurance, food assistant (food stamps, now SNAP), housing support, some agricultural subsidies, etc. plus the interest on the debt, in total account for about 69% of overall federal expenditures, currently planned for about $3.5 trillion. The Discretionary programs account for the remaining 31%. But the largest discretionary program by far is for National Defense/Military- which accounts for more than 50% of discretionary spending (and about 16% of all expenditures). If one also removes Homeland Security and Veteran Services from potential discretionary cuts, that leaves less than 15% of total budgeted expenditures available to absorb all the cuts to make up for the decreased revenue from all the proposed tax cuts. 

This then provides the justification for Trump and Ryan to propose the draconian cuts to everything remaining, including the Environmental Protection Agency, the Departments of State, Labor, Housing and Urban Development, Transportation, Education (including Student Loans), and even the Justice Department, to say nothing of the National Institutes of Health, Science, and the Humanities and the Corporation for Public Broadcasting. Some of these will be cuts to Mandatory programs which will require separate legislation, but most are discretionary and can be cut as part of the regular budget process. 

The only way to sustain the tax cuts Trump and the Congressional Republicans are proposing and avoid cutting some or all of these programs, is to increase deficit financing and the national debt on the order of $100s of billion. Which brings us to the next topic – the Debt Ceiling.

THE DEBT CEILING

The U.S. is only one of three advanced industrial nations with any legally binding national debt ceiling.  The others are Denmark and Poland. (And Denmark makes it a point to always maintain the ceiling far above its national debt.) When the U.S. Federal Government decides to spend more than it receives in tax revenue, the result is a deficit. In order to cover that deficit, it typically sells bonds.  This is quite predictable. The total of all U.S. government bonds outstanding is the National Debt.  The Debt Ceiling, which is established by an act of Congress, currently stands at $19.9 trillion. Our National Debt hit that ceiling a couple of months ago.  Our current GDP is $19 trillion, so the current debt is 103% of GDP.

However, $5.5 trillion is held by other U.S. government agencies, and an additional $2.5 is held by the Federal Reserve System, leaving $11.9 trillion held outside the government.  This amounts to 63% of GDP, and is the more significant figure. Of this, $6.3 trillion is held by foreign governments (which is 53% of that held outside the U.S. government).  The two biggest foreign holders currently are China and Japan, each with about $1.1 trillion. (Japan actually holds a bit more than China.) So each holds about 9.2% of the amount held outside the U.S. government, or 5.5% of the total National Debt.

When the U.S. National Debt hits the ceiling, the Treasure can shift funds between different agencies and accounts and, for some months, avoid having to borrow.  That is being done now. But once those options are exhausted, there is a major problem. According to the Treasury, this exhaustion of options is likely to happen sometime in August.

It is important to note that many of these bonds have a maturity of only 90 days, or 6 months or a year.  The longest are for 10 years.  Once a bond matures, the U.S. Treasury must pay back the bond holder, or default on the bond.  Normally this is done by simply rolling over the debt; that is, the Treasury simply sells another bond (that is, borrows from another bond holder) to get the money to pay the maturing bond off.  But if the Debt Ceiling prevents the Treasury from doing this, the maturing bond holder cannot be paid off, the U.S. is in default, and the entire world economy begins to collapse – because corporations, banks, insurance firms, pension funds around the world, other national governments and our own state governments all own U.S. bonds.  If we default, the value of all of these bonds becomes suspect, perhaps even indeterminate, and world-wide economic chaos occurs.  The U.S. Constitution requires the government to maintain “the full faith and credit” of the U.S. and its debt.  To allow the U.S. to go into default can be considered treason; it is certainly a violation of the Constitution. Sadly, it would appear that some Republican members of Congress do not understand this or simply don’t care, and have taken us to within hours of default in the past.  This resulted in a downgrading of the credit worthiness of the U.S. and a resulting increase in the interest rates we have to pay on these bonds.

So, Congress will have to address this problem in the next few weeks, at the latest.  Some Republicans are again threatening to refuse to raise the Debt Ceiling unless the Congress and President agree to their demands to reduce certain government expenditures or cut certain taxes or pass their version of healthcare reform.  And, all of these debates, as we described, in all likelihood are going to require that we borrow more, putting even more pressure on the Treasury.  This sort of game of chicken has also been called a Fiscal Cliff – and we are on the precipice of another of these today. We will see how close to the edge of the cliff we are pushed this year, or whether we fall over the edge.

One final note about legislative process:  Under current Senate procedures, bills that are considered to be “budget reconciliation” efforts can be passed with a 51 vote simple majority.  All other legislation is currently subject to filibuster and requires 60 votes to be considered and passed.  The Republicans understand that none of the bills discussed above, that is the healthcare/health insurance, expenditure or tax bills they want to implement, have a chance of gaining the 8 Democratic Party votes needed. (There are 52 Republicans currently in the Senate.) So they are determined to have them all considered “budget reconciliation” matters. But only one such bill can be considered at a time.  So they cannot begin to move on their tax or expenditure bills, until they dispose of their healthcare bill.  Hence the sense of urgency, even panic, among the Republican leadership about getting that bill decided immediately.  Indeed, they may even be forced to set it aside if they cannot get to the needed 50 votes (the Vice President can cast a tie-breaking vote) in order to move on to the expenditure and tax bills in time for the start of the 2018 Fiscal Year.    Whether they succeed, in whole or in part, in any of these efforts remains to be seen.

Finally, a few words about the changes in the Dodd-Frank law that Trump and the Congressional Republicans are demanding.

PROPOSED CHANGES TO DODD-FRANK

First it is essential to understand that the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, as its name implies, has two major purposes and parts.  The first is a series of regulations to try to avoid another (after the 2007-2009 Great Recession) world economy threatening financial collapse due to irresponsible, one could argue criminal, games being played by the major banks.  These regulations call for four things:

1.     that the banks, especially the so-called too-big-to-be allowed-fail banks, must hold much larger reserves than they typically had done in the past

2.     that all banks, including mid-sized and community banks and credit unions, run and report on a quarterly basis a series of “stress tests” to determine how they would fare in various circumstances

3.     that, to at least a limited extent, banks keep their commercial (taking deposits and making loans) banking activities separate from their investment efforts, and report regularly on at least a significant proportion of those investment activities. (This is far less restrictive than what was required by the 1930s Glass-Steagall Act that Bill Clinton agreed to abolish.)

4.     that the too-big-to- be-allowed-to-fail banks prepare contingency plans as to how they would be dissolved in an orderly manner, if indeed they were to be on the verge of collapse again.

The banks hate having to comply with any and all of these regulations, and Trump and the Congressional Republicans are calling for greatly weakening, if not elimination, all of these regulations.

The second purpose and part of Dodd-Frank was the creation of the Federal Consumer Financial Protection Bureau (CFPB) which was largely designed by Elizabeth Warren and begun under her temporary leadership. As its name implies, for the first time, there is a federal agency that accepts consumer complaints about financial institutions, mounts investigations into financial agencies it suspects are acting improperly, including large non-bank agencies such as credit reporting agencies, debt collection firms, mortgage brokers and student loan programs, and can impose fines and other penalties when it finds unfair practices or wrong-doing.  It is run as an arm of the Federal Reserve System, gets its budget from the Fed’s own funds (and not from Congress via an appropriation), and is led by a Director appointed by the President subject to the approval of the Senate.

Trump and the Congressional Republicans object to the structure, power, and actions of the CFPB. Most of them would like to abolish it entirely, but failing that they want its budget to be subject to the Congressional appropriations process, its leadership to be in the hands of a commission of five people with representation from both parties, and its investigative and settlement powers severely limited. Most consumer groups want to keep its structure intact and expand its role and power, since, in fact, its results so far in finding and stopping unfair and illegal financial practices that have hurt consumers is outstanding.