Imagine, if you will. Washington. In the hands of adults. Making a budget deal. You are entering….
OK, Fantasyland. But let’s have some fun, shall we?
If there’s one thing we could use to nurse along this very long, mature economic expansion, it’s better fiscal policy than we’ve had. And while President Donald Trump’s instincts, few and weak, for post-election kumbaya lasted less than a day, the hope persists that Trump and the new Democratic Party majority in the House of Representatives will make some kind of deal for good government.
Maybe on the budget, soon to be sporting a trillion-dollar deficit again. Maybe on justice and equity, which took a huge hit from the same 2017 tax bill that’s creating the trillion-dollar deficit, with help from a big increase in defense spending. Or maybe on infrastructure — wake up! — the boring-but-important stuff of building roads and airports that puts most people to sleep, but puts others to work.
How about all three?
Here’s how it could work, if Trump wanted to act like a grownup for a change and incoming House Speaker Nancy Pelosi and Senate Democratic Leader Chuck Schumer were willing to risk giving Trump a win in order to help the country. Neither is a short-odds prospect, but think it through.
It’s a trade, a Big Trumpy Deal: Congress would repeal the part of the tax cut that slashed the taxable income and tax rate of so-called “pass through” entities, mostly small businesses owned by very-affluent professionals. It would spend the money on infrastructure programs both parties say they want, which generate construction jobs quickly and pay long-lasting economic dividends if you choose projects wisely.
If there’s money left over, you can pay for that tax cut Trump dangled before audiences in the weeks before the election. If there’s not — and there won’t be much — a tax cut could be financed mostly by a reversion in defense spending toward its longer-run mean.
Let’s do the numbers.
The 20% tax exemption for pass-through entities will cost the Treasury about $50 billion in fiscal 2020. That would pay for a 50% increase in federal transportation spending right off the bat, if you wanted to use it all there.
It wouldn’t be hard to spend the money productively, since transportation capital projects tend to be important, big and expensive — around New York, the recently completed replacement of the Tappan Zee Bridge over the Hudson River north of the city cost $4 billion, the ongoing renovation of LaGuardia Airport is ticketed at $8 billion, and the Gateway rail project funded by the 2009 stimulus but derailed by then-New Jersey Gov. Chris Christie’s refusal to accept the federal money, would cost an estimated $30 billion now. Even the lower-profile renovation of the Pulaski Skyway in Jersey City cost more than $1 billion.
(Note: Since airport and bridge deals were largely state-funded, and in each case are spread over several years, projects like these wouldn’t chew up the increased federal transportation funding as quickly as you might think).
Conveniently, that amount of spending would bring annual outlays for transportation infrastructure back to their historical average of about 2.5% of gross domestic product, from 2.3% now, a number that has dropped throughout this expansion, according to the Congressional Budget Office.
It’s a very neat match. It requires the political will to assert that income made from self-employment isn’t so much worthier than wage income that it deserves special treatment. And it reroutes money from pass-through owners — almost half of that tax cut goes to people earning $1 million a year or more — to construction workers, engineers and manufacturing workers.
The defense deal would work like this: Spending bills Trump signed raised the fiscal 2019 defense budget about $70 billion from 2017. No one has officially costed out a 10% middle-class tax cut, but my colleague Steve Goldstein’s back-of-the-envelope estimate was $90 billion a year.
Trade one for the other? That’s a question elections can be about.
Or you could take the money saved by either reversing the pass-through cuts, plus the money from boosting the 37% top bracket back to 39.6%, and cut the deficit. (This leaves the corporate tax cut intact). The middle class’ savings would then come from lower interest rates, not a tax cut, as the smaller deficit takes away the #1 or #2 reason for central banks to fear rising inflation (the other being low unemployment).
These are choices adults consider, when not sulking in French hotel rooms and tweeting about Senate elections. Indeed, Ronald Reagan’s 1982 partial rollback of his 1981 tax cut, passed to reduce a deficit surge the first bill caused, also shows that smart course adjustments help get presidents re-elected.
Or the next president can do it for him.
