When Republicans began assembling their tax overhaul proposals they were aiming to make them revenue neutral; the tax cuts could not lead to increased deficits. Holding the line on deficits has long been the goal of Republican deficit hawks.
But that goal is now just a memory. Both the House and Senate proposals provide overall tax cuts in the $1.5 trillion dollar range over the next decade. But, there’s no plan to offset them with cuts in government spending or new revenues. So, over the next ten years, the tax cuts will likely add about $1.5 trillion to the national debt according several estimates, including the Congressional Budget Office and Joint Tax Committee.
Yesterday, longtime deficit hawk Sen. Jeff Flake, R-Ariz., released a statement expressing concern that “the current tax reform proposals will grow the already staggering national debt.” The debt currently is more than $20 trillion dollars. Flake suggest adding $1.5 trillion more to the debt over the next 10 years could threaten the economy. Economist Len Burman echos that sentiment:
“This is a ridiculous time to think about additional borrowing.”
Burman, who is a co-founder of the Tax Policy Center, says that’s because the U.S. debt is already large and growing, and is expected to balloon as the baby boom retires and the cost of Social Security, Medicare and Medicaid rise sharply. “At some point we accumulate so much debt that we could do serious harm to our economy.”
The huge deficits could drive up interest rates, says Burman, which would slow growth. Or, he says, in an extreme case, the U.S. could fail to pay its debts and trigger a global financial crisis. Lawmakers flirt with that idea every time they fight over raising the government’s debt limit. Burman says at some point the U.S. will have to limit its borrowing and pay its debt.
“The thing that bugs me about deficit financing is we really don’t know who is going to bear the burden of the debt,” says Burman.
But we have a good idea of who will get the benefit of the tax cuts that produce the additional $1.5 trillion dollars worth of debt; the vast majority will go to businesses and high-income individuals. “People in the top 1 percent get a tax cut of over $37,000,” says Burman. That’s for 2018. Meanwhile, people in the bottom 10 percent get a tax cut, on average, of about $60 dollars in 2018.
And, in fact, there are some clues about who might bear the burden of restraining deficit spending. It was a big theme in President Trump’s 2018 budget proposal. To hold down the increase in the annual deficit and the accumulated debt, the White House would cut a number of social welfare programs that help people on a low income, along with education and criminal justice programs.
Douglas Holtz-Eakin, former director of the Congressional Budget Office and adviser to Republican candidates, is also concerned about the growing debt.
“A tax reform that allows for a trillion and a half of additional deficits over the next 10 years is in and of itself not very attractive.”
But, Holtz-Eakin says, he believes there are enough positive elements in the tax bills to incentivize business investment that will boost growth and wages. That, he says, is a big benefit to the middle class.
But what about the $1.5 trillion in additional debt? Secretary of the Treasury Steve Mnuchin says tax reform will pay for itself by boosting growth and producing more tham $1.5 trillion in added tax revenue. Holtz-Eakin disagrees. Optimistically, he says, tax reform might pay for half of what it costs.
Burman says that’s too optimistic. He says mainstream economic models suggest the initial growth spurt from tax cuts is later offset by slower growth, so the negative debt effects remain.