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Watch Measuring the True Cost of Trump Tax Cuts - Bloomberg

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00:00Some tax cut provisions are set to terminate by the end of next year. And here to talk about the potential implications for the economy is Natasha Sarin. She is Yale Law School associate professor along with Wall Street week's David Westin. David, it's never too early to start talking about taxes. Welcome to tax day. Coming up on < onday, April 15th so it's just fitting. Great to have you here in New York. So first of all, talk about the budget lab because this is something new that you just created. Just describe what you're doing. Yeah, well, we're incredibly excited to be launching this week and launching right around Tax Day and into an incoming tax debate. Our our kind of focus is oriented around trying to provide policymakers the tools they need to do effective policy analysis. And I spent the first two years of the Biden administration in the Treasury Department, where I was very lucky to get to be part of a bunch of legislative conversations that were happening around what ultimately became the CHIPS Act, the bipartisan infrastructure law build back better, which morphed into the Inflation Reduction Act. And through the course of all those conversations, I realized the importance and the centrality of what are called budget scores in the legislative process. And these scores are essentially like cost estimates. They're like, how much is a particular spending proposal going to cost over a decade? How much is a particular tax provision going to raise over a decade? But for a lot of stuff that I hope Katie and David, you guys would be enthusiastic to see the government do things like investing in a fully refundable and expanded child tax credit that lifts 90 million kids out of poverty or investing in emissions reduction through things like the green energy subsidies and tax credits that were passed in the Inflation Reduction Act, the like right way to think about those benefits, is it through the lens of just whatever the costs are over ten years? And so what I want to build with my team and I co-founded this with two former colleagues, Martha Gimbel and Danny Yagan, who's an economist at Berkeley, is really the infrastructure to help policymakers think more holistically about what the costs and what the benefits of particular provisions actually are. Well, let's talk about what you've put out from the budget labs so far. Of course, looking at the expiration and taking a look at different scenarios here, you have full extension, you have partial extension, and then you have a tax plan proposed by you and a colleague. What would full extension look like when you think about the effects on GDP, for example? So full extension is the idea of basically fully deficit financing the $3 trillion of Trump tax credits that are set to expire in 2025. And what you see that happens if you do a deficit financed tax plan of that size, is that in the short run, sure, you're going to get a little bit of demand boost because after tax incomes are going to go up. But in the long run, you're seeing really sizable costs for households. And those costs have to do with higher interest rates, more inflation, and all of that is demonstrated in the model. You can see that we're going to cost the American economy in terms of growth over the course of the next few decades, hundreds of billions of dollars. If we don't find a way to pay for whatever provisions that policymakers decide that they want to extend. Well, that's the key thing, is they're paying for them is the issue. And if you look at the chart, it's pretty dramatic that you have on the website. Actually, the real GDP really goes up in the early years. Totally. If they extend the tax cuts, it really goes down in the out years and it does the reverse. Actually, if they don't extend it, how much of that is just because of we are going gonna have to borrow so much money that perhaps we can't even afford. That's exactly what it is. So baseline, if you don't do anything with respect to extending the expiring provisions of the TCJA so you just say let them all expire. Debt to GDP ratios are going to rise to 116% over the course of the next decade. If you're in a situation where you say instead, let's extend all of them, the deficit financed them, this full extension model debt to GDP ratios are going to rise to over 130%. And those types of fiscal costs bear on households directly. We're already seeing it in the form of higher interest rates that households face and inflation that households are facing. And so I think it's really important for policymakers as they think through this debate that's upcoming to try to grapple with. And we try to, in our modeling, help them grapple with what some of those consequences might actually be. But is that how politicians think? I mean, if you take a look at what you've found when it comes to just extending some of these tax cuts, that leads to higher real GDP levels in the short term. We're talking about the short term here. But if you're running on a four year cycle, I mean, maybe you care about the short term. So I you know, I teach corporate finance at Yale and I teach my students like how do corporate executives make decisions. And one thing I say is like, if you're thinking about whether you're a CEO, you want to buy a new factory, you kind of think about, okay, it's going to cost me something today to buy my new factory, but in the long run. What I'm going to see is maybe the new factory helps me produce more efficiently or helps me launch a new product line. And so certainly, like this cost benefit tradeoff has to be central to my decision making process. And it's strange that the government doesn't have that centrality with respect to how it thinks of both sides of the ledger. And I'm a little optimistic, Katie, that if we develop the tools and the infrastructure, which is what the budget lab is doing to help them do this work, they'll actually find it to be a useful input into their process. Because you can see that investing in kids today, in 30 years, those kids are more productive members of the labor force and that pays off real returns. And that's something that we should care about. That cost benefit has certainly ramifications across the entire economy, but it also has disproportionate effects on various percentages. Quintiles Often we divide them into give us a sense of what happens if you renew or don't renew the Trump tax cuts in terms of households. So the nature of the way the Trump tax cuts are designed is they provide the biggest benefit for those at the top. And so if you look at the average benefit that the top average cut, that the top 1% is going to see if we just fully extend these Trump tax credits, that's going to be on the order of magnitude of around $50,000. You compare that to the very bottom of the distribution, it's a few hundred dollars. So from an inequality perspective, if you just fully extend the Trump tax credits or the Trump tax cuts, what you're going to see is more than twice the gain in after tax income. We have a chart, so maybe you all are looking at it more than twice the gain in after tax income for those at the very top relative to those at the very bottom. And it strikes me that like as we think about sort of high and rising inequality in this country, that's something that policymakers care about, too, is understanding how can they help reach exactly the most vulnerable households?

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Measuring the True Cost of Trump Tax Cuts

Natasha Sarin, professor at Yale Law School, is the co-founder of The Budget Lab, which analyzes federal policy proposals for the American economy. She says that a full extension of the Tax Cuts and Jobs Act would cost the economy hundreds of billions of dollars over the next few decades. (Source: Bloomberg)

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