Director of the Office of Management and Budget (OMB) Mick Mulvaney used to be one of the fiscal conservatives pushing for spending cuts, co-founding the House Freedom Caucus. As the Trump administration pushes its tax reform framework, he says he is still worried about the deficit. But that doesn’t stop him from supporting tax reform.
“The size of the debt concerns me now. Let’s be perfectly straightforward about that,” he said. “In fact the 75% is just the public debt. If you do the whole debt subject to the capital, what we call gross debt, total debt, then you end up with about 100% of the American economy right now. And those numbers concern me right now.”
An expanding deficit could impact rising entitlement costs (including Social Security) and also put downward pressure on asset prices, moving interest rates up quickly and hindering economic growth.
But Mulvaney insists that GDP growth will offset any worries about the deficit.
“Debt to GDP is a ratio,” he said. “It’s got two different pieces to it. It’s the size of the debt, but the denominator is the size of the GDP. And if we can grow GDP quicker than we’re growing the debt, then that ratio will start to come down. And that’s one of things we’re focusing on.”
The administration insists that cutting marginal tax rates and corporate taxes will spur investment, hiring and economic activity, which would ultimately boost long-term GDP growth projections from 2% to 3%.
“Let companies succeed here. Let them make money here. Let folks get better jobs here. And let that rising tide lift all ships,” Mulvaney said.
Pushing tax reform forward
Debt-to-GDP currently stands at 75% and would rise to more than 100% a decade from now based on the current Trump framework, Moody’s Mark Zandi said. Zandi added that even with no changes to tax policy, it would rise to 93%. Furthermore, the non-partisan Tax Policy Center estimates that the current framework will reduce government revenue by $2.4 trillion in the first decade.
And there’s limited evidence that cutting marginal tax rates will impact growth. In fact, the economy saw strong growth following the tax increase under Bill Clinton in 1993. On the contrary, the Bush tax cuts in 2001 and 2003 did not improve economic growth. Meanwhile, studies show that cutting corporate taxes will mostly benefit shareholders versus workers.
The Council of Economic Advisors (CEA) produced a report this week connecting corporate tax cuts to wage growth of about $4,000 for the average family but others, including former Treasury Secretary Larry Summers, have called it ‘dishonest.’
Mulvaney said the solution is all about bringing cash back to the US.
“What we’re trying to do with this tax code is to get folks to move their earnings back to the United States to re-establish that connection so that every 1% of corporate increase in profit means a 1% increase to household incomes,” he told Yahoo Finance.
The administration has pushed its tax framework and is now waiting for next steps to move toward legislation.
“I still think there’s a chance to do it in December,” Mulvaney said. “Everything has to go right for that to happen including the Senate voting on the budget this week.”
Nicole Sinclair is markets correspondent at Yahoo Finance
For more from Yahoo Finance’s interview with Mick Mulvaney, see here:
Mick Mulvaney: The appetite for spending reductions is low
Please also see:
Gary Cohn: Here’s how I expect corporate tax cuts to spur growth
Gary Cohn: We won’t put conditions on repatriated cash, and we’re fine with stock buybacks
Gary Cohn: ‘The estate tax is really about small business’
Gary Cohn: ‘We have to have a permanent change in the tax system’