Trump Administration Hits Out at Deep Stater IMF Over Tax Reforms

0
15
IMF

This post was originally published on Financial Times.

Trump Administration Hits Out at Deep Stater IMF Over Tax Reforms

Mick Mulvaney: ‘When I introduced the concept of 3% growth in my budget I was laughed out of the room. We are there now’ © FT montage;AP

President Donald Trump’s budget director has attacked the International Monetary Fund and other critics of the administration’s tax cut plan, accusing them of wanting the reforms to fail.

Mick Mulvaney, the head of the Office of Management and Budget, said in an Financial Times interview that sceptics of the plan were “heavily invested in it not working out”.

Champions of the tax reform — now the centrepiece of the administration’s legislative agenda — say that by slashing corporate and individual rates it will boost growth and hence government receipts.

But the IMF is urging countries with significant deficits to raise, not lower, tax.

Vitor Gaspar, the fund’s head of fiscal affairs, told the Financial Times: “The idea that one would produce additional revenue by lowering tax rates is something that, being a conceptual possibility, is rarely documented empirically.”

Asked about the IMF’s scepticism, Mr Mulvaney, previously a deficit hawk, said: “Yes, they are heavily invested in it not working out.” He drew a parallel with critics who challenge the growth-enhancing properties of Mr Trump’s deregulatory agenda.

“There are folks that are invested in seeing this fail because if it works then what is their argument for re-regulating? By the same token, if lowering tax does actually lead to growth, what is their argument going to be for raising taxes in the future?”

Mr Gaspar cautioned that it was not possible without full details of US tax plans to estimate the impact on tax revenues or growth. “Policy has to be evidence based. One needs to study very carefully the particulars of the situation,” he said. But he added: “The frequency of situations where tax cuts pay for themselves is low.”

Last month Steven Mnuchin, the US Treasury secretary, said the Republican tax-cutting plan will cut the deficit by $1tn because it will generate more growth and revenue — a notion dismissed by many economists.

Maurice Obstfeld, IMF chief economist, said on Tuesday that any US tax reform should not increase the budget shortfall. “If the stance of fiscal policy turns out to be very expansionary with a big deficit, that would have implications for the dollar, possibly for growth and the current account deficit,” he added.

The fund’s fiscal monitor, a closely watched publication released on Wednesday, highlights the scope that it thinks countries have to raise income-tax rates for top incomes without harming growth. “We do not find systematic evidence that increasing tax progressivity hurts growth,” Mr Gaspar said.

Share this chart

He urged countries to take action to tackle high public debt while times were good and the economic data were strong. “Countries which lack fiscal buffers or where public debt levels are very high should use the current favourable business cycle to address the issues.”

The IMF supported US ambitions to remove income tax deductions and close loopholes. “Better off individuals use tax loopholes much more than those who are not as well off, which means that progressivity, in practice, is much less than what you would have guessed based on tax rates alone,” Mr Gaspar said.

The Trump administration has been derided by critics for basing its budget and tax assumptions on heady growth projection, pointing to an expansion of 3 per cent or more. Mr Mulvaney said, however, that the economy was overshooting what the White House had expected in its March budget, with GDP growth set to average about 3 per cent over the second, third and fourth quarters of 2017.

“When I introduced the concept of 3 per cent growth in my budget in March I was laughed out of the room. We are there now,” he said. “We are trying to target our tax reforms at productivity, with the theory that maybe those types of reductions, those types of reforms, will lead to the GDP growth that the IMF says is impossible.”

In the interview Mr Mulvaney expressed optimism that the dispute between Senator Bob Corker and Mr Trump would not get in the way of tax reform. The two have been hurling insults at each other, with the president saying Mr Corker lacks the guts to run again next year and the senator warning Mr Trump could lead the US into a third world war. Mr Corker opposes tax cuts that increase the deficit.

Mr Mulvaney, a former Congressman, said he had had spats with colleagues in the past and that they had not got in the way of his policy decisions. “I have got to think Senator Corker will continue to judge legislation on its merits, not based on whether the president likes it or not.”

Some Republican senators including Marco Rubio of Florida have been urging the government to expand the child tax credit as part of its bid to make the reforms more positive for the US middle class. Mr Mulvaney suggested the administration was open to a discussion on that point, adding: “That is part of the details you are going to see get worked out during the legislative process.”

This post was originally published on Financial Times.