“Credit Negative For U.S. Government”: Moody’s Threatens Downgrade If Trump Tax Plan Is Passed
As various institutions continue to publish very detailed estimates of how Trump’s tax plan will impact the federal budget, which is somewhat amazing since income brackets haven’t even been assigned yet, Moody’s published a note today threatening to finally strip the U.S. of its AAA credit rating if the tax plan is ultimately passed as currently contemplated.
President Donald Trump’s tax proposal would probably weigh on the U.S. government’s credit outlook, on concerns that it would cause the federal deficit to swell, according to Moody’s Investors Service.
“The Trump tax framework is likely credit negative for the U.S. government,” Moody’s said in a statement. “Tax cuts would not be offset by equivalent cuts to spending, which would put upward pressure on the federal budget deficit and debt,”while “the tax reform’s effect on economic growth and, in turn, federal government revenue would also affect U.S. credit strength.”
By contrast, banks, insurers and asset managers would benefit from a lower tax rate, Moody’s said.
As we pointed out last Friday, the Tax Policy Center found that Trump’s plan would cost $2.4 trillion over the first decade, assuming no spending cuts, and result in federal deficits soaring by several hundred billion dollars each year.
- The proposal would reduce federal revenues by $2.4 trillion over the first ten years and $3.2 in the second decade. This means that absent a matched deduction in spending, US deficit and debt will increase by a similar amount. This is a problem as a Senate GOP budget resolution unveiled on Friday only allows for adding $1.5 trillion to the debt, implying a revenue shortfall of just under $1 trillion.
- The business income tax provisions—including those affecting corporations and pass-through businesses—would reduce revenues by $2.6 trillion over the first ten years. Elimination of estate and gift taxes would lose another $240 billion. The individual income tax provisions (excluding those related to business income) would increase revenues by about $470 billion over the same period.
So, just to summarize Moody’s position on this issue, a ~$1.5 trillion budget deficit in 2009 was no problem at all but a ~$1 trillion budget deficit today would suddenly merit a downgrade.
Of course, the Trump administration has argued that increased GDP growth will offset lower tax receipts and actually result in lower deficits rather than higher.