The GOP tax plan could bring about a similar budgetary problem: The U.S. Congressional Budget Office estimates the cuts will add approximately $1.3 trillion to the deficit over the next decade, according to Roach, also ex-chairman of Morgan Stanley Asia.
“Now, the Republicans of course say this is a self-financing tax cut … They’ve told us this repeatedly over the past 25 to 30 years. It’s never worked out that way,” Roach said.
Reagan’s 1986 tax reform was designed to be revenue-neutral. That is, any loss in revenue from the cuts had to be counterbalanced by revenue gains so that total tax proceeds remained constant.
One way his administration tried to achieve that goal was by increasing the maximum tax rate on long-term capital gains from 20 to 28 percent at the same time it lowered the rate on ordinary income from 50 to 28 percent.
And although Republicans today similarly assure Americans that the planned tax cuts will be self-financing, the specific argument they’re presenting holds no water, according to Roach.
While Congress has said that the economic expansion arising from the move will fundamentally cover the budgetary losses incurred from the cuts, Roach said that the connection between growth and tax cuts that Congress is proposing is “tenuous” and “a real stretch.”
Expansionary policies are necessary for the United States to restore its competitiveness in the global economy, but fiscal prudence must not be forgotten at this time, Roach asserted.
“We are lacking in savings. For a savings-short U.S. economy, you can’t just legislate an extraordinary wishlist of ambitious programs without thinking about the funding issues,” Roach said.
“We’re really flirting with potentially a very serious problem in terms of funding that will have very ominous consequences for the U.S. markets and the economy,” he said.