The Penny Plan Is a Spending-Cap Formula to Make the Trump Tax Cuts Feasible

August 11, 2016 by Dan Mitchell @ International Liberty

I don’t like election years because the policy debate tends to revolve around the various proposals put forth by candidates. And since those ideas generally don’t make much sense, it’s a frustrating period.
But the silver lining to that dark cloud is that it does create opportunities to comment on what the candidates are saying…and hopefully steer the discussion in a more productive direction.

For instance, I just authored a column about Trump’s plan for Time. I pointed out what’s good (such as a lower corporate rate and death tax repeal), what’s bad (pork-barrel infrastructure and a whiff on entitlement reform), and what’s ugly (protectionism and a new loophole for childcare costs).

But my biggest complaint, which was part of the “bad” section, dealt with Trump’s failure to produce any plan to control the size of government. And echoing a point I made late last year, a big tax cut simply isn’t viable unless it’s accompanied by a credible proposal to rein in Leviathan.

It will be very hard to have a tax cut of any size unless Trump also has some sort of plan to limit the growth of government spending. Unfortunately, outside of vague rhetoric about “waste, fraud, and abuse,” it’s unclear that he is serious about the spending side of the fiscal ledger.

I also made similar points in this CNBC interview, which covered all of the main features of Trump’s economic agenda.



You’ll notice in the interview that I said Trump should propose some sort of spending cap.
Well, maybe my wish will be granted. A story published by Bloomberg looks at Trump’s flirtation with a specific form of spending cap known as the Penny Plan.

Donald Trump on Tuesday revisited a budget-trimming measure called the “penny plan” in response to fresh questions about how he’d finance his agenda. “Well, we’re cutting back, I mean whether it’s a penny plan—which is something that, as simple as it is, I’ve always sort of liked,” the Republican presidential nominee said on Fox Business… Trump remained short on further specifics about how he’d pay for his proposals.

But let’s say he goes beyond sympathetic comments and actually embraces the Penny Plan. The article gives some detail of the proposal.

In variations of the “penny plan,” …one cent is cut per dollar in the federal budget over a period of six or seven years and a spending cap is imposed until the budget is balanced. Different programs can see greater than 1 percent cuts—or no cuts—as long as overall spending is reduced by 1 percent each year… The math generally works out, the nonpartisan fact-checking website PolitiFact found in 2012 when analyzing a Republican lawmaker’s version of the proposal.

And for further detail, Justin Bogie and Romina Boccia have a column in the Daily Signal.

Last week, a House Budget Committee member, Rep. Mark Sanford, R-S.C., and the Senate Budget Committee chairman, Sen. Mike Enzi, R-Wyo., introduced the “Penny Plan,” which would implement an aggregate spending cap beginning in 2017 and “would cut a single penny from every dollar the federal government spends.” Under this plan, for fiscal year 2017, the cap would be $3.6 trillion for total noninterest outlays minus 1 percent. For each subsequent year through 2021, outlays would be capped at the previous year’s level (not including net interest payments) minus 1 percent.

Wow, this is hard-core spending restraint.

I have written favorably about the Penny Plan, but I normally promote the Swiss Debt Brake, which is a spending cap that has allowed government spending to grow each year by an average of 2 percent.

I must be a big-government squish!

Here are more details on the Penny Plan. Most important, it is enforced by sequestration.

…spending reductions necessary to arrive at the capped level would be enforced by sequestration. Unlike the current form of sequestration applied to the Budget Control Act spending caps, the Penny Plan would not exempt any of the programs listed under the Balanced Budget and Emergency Deficit Control Act of 1985, except payments for net interest. …Spending caps, enforced with automatic cuts, serve to motivate Congress to prioritize among competing demands for resources. Designed properly, caps can curb excessive spending growth over the long run.

The bottom line, according to Bogie and Boccia, is that a sequester-enforced spending cap is critical for good long-run fiscal policy.

The Penny Plan takes a step toward consideration of a statutory spending cap to limit the growth in government and improve the nation’s fiscal course. Congress must put the country’s budget on a sustainable path to secure prosperity for current and future generations, and a spending cap is one important tool to get there.

My bottom line is similar. I’m a huge fan of spending caps (which have a much better track record than balanced budget requirements).

The key is to make sure that government grows slower than the private sector. And the more spending is restrained (especially if it’s actually cut 1 percent each year), the quicker and better the results.

There’s lots of evidence of nations getting good results when they cap spending. I don’t know if Donald Trump is serious about a spending cap (or whether he’s serious about the policies needed to make sure overall spending stays within a cap), but I know it’s the right policy.