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GOP Tax Cuts Expected To Push Up Nation's Debt

Nov 10, 2017
Originally published on November 15, 2017 12:38 pm

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 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 10 years, the tax cuts are likely to add about $1.5 trillion to the national debt, according to the nonpartisan Congressional Budget Office.

Thursday, 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. Flake suggested that adding $1.5 trillion more to the debt over the next 10 years could threaten the economy.

Economist Len Burman echoes 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 is because the U.S. debt, already large and growing, is expected to balloon as the baby boomers retire 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 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 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 with low incomes, 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.

And what about the $1.5 trillion in additional debt? Secretary of the Treasury Steven Mnuchin says tax reform will pay for itself by boosting growth and producing more than $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.

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One thing the House and Senate tax proposals have in common is that over the next 10 years, they are both likely to add $1.5 trillion to the national debt. The Congressional Budget Office has confirmed the House version would do that. NPR's John Ydstie reports that pushing up the debt is a big concern for many economists and for some lawmakers.

JOHN YDSTIE, BYLINE: When Republicans first began assembling their tax overhaul proposals, their aim was to make sure tax cuts did not lead to increased deficits and add to the already troubling $20 trillion federal debt. That's long been the goal of Republican deficit hawks. But that goal is now just a memory. Neither the House nor the Senate proposal to cut taxes by $1.5 trillion is accompanied by a plan to offset that lost revenue with spending reductions or new revenues. Yesterday, longtime deficit hawk Republican Jeff Flake of Arizona said in a statement that the current tax reform proposals will grow the already staggering national debt. And he said that could threaten the economy. Economist Len Burman agrees.

LEN BURMAN: This is a ridiculous time to be thinking of additional borrowing.

YDSTIE: Burman, who is co-founder of the Tax Policy Center, says the deficit is already expected to balloon as baby boomers retire and the cost of Social Security, Medicare and Medicaid rise sharply.

BURMAN: At some point, we accumulate so much debt that we could do serious harm to our economy.

YDSTIE: Burman says the huge deficits could drive up interest rates and slow growth. And in an extreme case, the U.S. could fail to pay its debts and trigger a global financial crisis. Lawmakers flirt with that every time they fight over raising the debt limit. Burman says while the U.S. has avoided a crisis so far, at some point the government will have to limit its borrowing and pay its debts.

BURMAN: The thing that bugs me about deficit financing is we really don't know who's going to bear the burden of the debt.

YDSTIE: But he says we have a good idea who will get the benefit of the tax cuts that produce the additional $1.5 trillion worth of debt. The vast majority will go to businesses and high-income individuals. 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.

BURMAN: A lot of social welfare programs that help low-income people would be cut dramatically.

YDSTIE: Former CBO director and adviser to Republican candidates Douglas Holtz-Eakin is also concerned about the growing debt.

DOUGLAS HOLTZ-EAKIN: So having 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.

YDSTIE: 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. And that's a big benefit for the middle class, he says.

HOLTZ-EAKIN: If the tax reform is done well, they'll get the most out of it because there's nothing more important to the middle class than to have an economy where real wages are actually rising.

YDSTIE: But what about that one and a half trillion dollars in additional debt? Secretary of the Treasury Steve Mnuchin says tax reform will pay for itself by boosting growth and producing more than that amount in added tax revenue. Holtz-Eakin disagrees. He says optimistically, successful tax reform might pay for half of what it costs. Len Burman says even 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. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.