The simple math error in President Trump's 2018 budget proposal


Photo of the cover of the Trump administration's 2018 budget at whitehouse.gov

Can it be true that Trump administration officials, many of them business executives, can't do correct budget accounting?Apparently so, Maybe government budgeting is much harder than business accounting.

The Trump administration has made an elementary math mistake in the 2018 budget proposal submitted to Congress. The Wall Street Journal and the New York Times reported the error. Larry Summers, esteemed economist, Harvard University President emeritus and U.S. Secretary of Treasury under Bill Clinton, called the mistake, “the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them.”

The New York Times piece stated of the error, "It is the rough equivalent of trying to raise $10,000 for a project expected to produce $100,000 in revenue, and telling investors the profit will total $100,000. It won’t, because you have to account for the cost." To be fair the Times piece said a bit more than this, but, after reading that piece, many readers may still come away puzzled, not quite getting the mistake that was being alleged.

Similarly, The Wall Street Journal says of the mistake, "The [Trump] budget also appears to double count some of the benefits of faster economic growth: Once to offset the effects of lower tax rates on government revenue and a second time to help close the budget deficit over time." That helps. But readers may be puzzled still.

And Larry Summers, in his blog post, says of the mistake, "Then the administration asserts that it will propose revenue neutral tax cuts with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count. You can’t use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least you cannot do so in a world of logic."

Summers goes on to compare the Trump administration error to a business error saying, "This error is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenue while failing to account for the fact that the investments would actually cost some money to make." Again this may cause some puzzlement among readers, since it is not obvious that the business is engaging in double counting rather than just failing to subtract the cost of the investment from the revenue generated by the investment.

So let's see if we can do a little example using some hypothetical small numbers to make clear the Trump mistake.

Let's start with hypothetical year zero before the tax cut. (GDP is annual gross domestic product, or the sum of the nation's annual incomes, i.e., the total of all income produced annually by the economy.)

Table A (b is for billions)

GDP Tax %GDP Gov.Revenue Gov.Spending Gov. Deficit

$100b 20% $20b $22b $2b or 2%GDP

You see in this example that in year zero government revenue is short of spending, leaving a deficit of 2.0 percent of GDP. In the real economy as opposed to our example, the true U.S. government deficit for 2017 is projected to be 2.6 percent of GDP, so we are not too far off from reality there. In 2017 U.S GDP is projected to be $19 trillion and the government deficit to be $603 billion, so you see we are using much smaller numbers in our example.

Now suppose, in our example, we enact a 10% tax cut. Assuming no other changes, the government will lose revenue:

Table B

GDP Tax %GDP Gov.Revenue Gov.Spending Gov. Deficit

$100b 18% $18b $22b $4b or 4%GDP

The tax cut has cost the government $2 billion in lost revenue. The budget deficit has just doubled.

Does the government get anything for the $2 billion loss in revenue, which from the perspective of the government budget, is the cost of the tax cut? The Trump administration says yes, the government does get a return on the $2 billion. They say that the tax cut will spur businesses to invest more and consumers to spend more and this will spur economic growth so that growth in GDP rises from the current 2 percent per year to 3 percent per year, a rise of one percentage point. (a rise of one percentage point in a $19 trillion economy is a big deal). And that will be enough, says the Trump people, to keep government revenues from falling and thus decrease the projected government deficit, rather than raise it.

Let's give them the benefit of the doubt and say that the tax cut will keep government revenues the same (very doubtful, I know of no data that shows a tax cut will lead to no loss in government revenues when the economy is so near full employment). But let's assume it is so, that GDP rises by enough to keep government revenues the same after the tax cut as they were before the tax cut. Here are the changes to our figures that would result with that assumption:

Table C

GDP Tax %GDP Gov.Revenue Gov.Spending Gov. Deficit

$111b 18% $20b $22b $2b or 1.8%GDP

This is a happy result if ever it could be achieved, more GDP and a smaller government deficit as a percentage of GDP. But the Trump administration doesn't stop at this rosy scenario. It goes on to claim that the tax cut will provide enough growth in GDP to entirely wipe out the government deficit. In our example, that would be the remaining $2 billion deficit in Table C. But we see in Table C that it can't be true. The $2 billion is already counted as increased government revenue, and it is why government revenue is back at $20 billion. It can't be counted twice, once to restore government revenues that would have been lost because of the tax cut, and then again to wipe out any remaining government deficit.

You can see it online at whitehouse.gov. The Trump proposed budget projects essentially a zero government deficit, not immediately, but in the year 2027. To do this, the Trump people are counting twice the "projected" increased revenue from the projected GDP growth from the tax, first by enough to keep the government revenue from falling as a result of the tax cut (in our example to keep government revenue at $20 billion). Then they say that same increase in revenue resulting from GDP growth will result in enough increased revenue to balance the budget (in our example to wipe out the remaining $2 billion dollar government deficit.

As Larry Summers says, " This is an elementary double count."

References:

The Larry Summers blog. http://larrysummers.com/category/blog/

The Wall Street Journal article:

https://www.wsj.com/articles/donald-trumps-balanced-budget-goal-rests-on-questionable-math-1495544546?tesla=y&mod=djemCapitalJournalDaybreak

The New York Times article:

https://www.nytimes.com/2017/05/23/us/politics/budget-cuts-deficit.html?ref=economy

The Trump budget proposal on line:

https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/budget.pdf

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