Deficit-Financed Tax Cuts 2.0

Blog Post
Monday, July 30, 2018

With the federal government rapidly sinking further and further into debt, House Ways and Means Committee Chairman Kevin Brady last week released a loose framework for tax legislation that would require even more federal borrowing.

This proposal flies in the face of fiscal responsibility.

With the federal debt at well above $21 trillion and the Trump administration itself projecting trillion-dollar deficits in each of the next three years, elected officials should be focusing on how to reduce the flood of red ink rather than increasing it.

Brady’s plan, described both as a “listening session framework” and “Tax Reform 2.0,” would increase the federal debt by . . . well, he doesn’t really know. But he says one piece of it -- permanently extending the individual tax cuts that were approved last December -- would cost about $600 billion.

Trump and many Republican lawmakers have argued that the deficit-financed tax cuts that were approved in December will boost economic growth so much that they will eventually “pay for themselves.” That’s wishful thinking, as The Concord Coalition and many other independent analysts have pointed out.

In its 10-year budget outlook last spring, the Congressional Budget Office (CBO) estimated that the December tax legislation increased deficits over that period by $1.3 trillion even after taking into account the increases in economic growth that it is projected to spur. Interest on this additional debt would raise the deficit by another $582 billion.

Last Wednesday The New York Times reported that the federal deficit was now rising even faster than economists -- including those in the administration -- had predicted in part because the amount of corporate taxes collected by the government had fallen to historically low levels in the first half of this year.

At least Brady has the courage to acknowledge that his proposed new tax cuts wouldn’t be free. The economic growth he expects from it, he says, will “offset some but not all the cost.”

But he and other “2.0” boosters don’t seem to have absorbed the basic lesson that deficit-financed tax cuts in strong economic times are bad public policy. They provide stimulus in the short-term that is not needed at the cost of long-term fiscal discipline, which certainly is needed.

Making matters worse, other deficit-financed tax cuts are in the works. The House last week passed three measures that would repeal a tax on medical-device manufacturers, expand the use of tax-sheltered health savings accounts in a variety of ways, and further delay a tax on medical insurers.

These bills face uncertain futures in the Senate. But if all three were to become to become law, the combined revenue loss for the government is estimated at about $88 billion over 10 years.

It’s not as if tax cuts are warranted by lowered spending. On the contrary, last spring Republicans and Democrats in Congress approved a budget-busting spending package that also requires additional government borrowing.

That, along with the December tax cuts, contributed to CBO’s projection that total deficits over the next decade will total nearly $12.42 trillion.

If Congress and the president want to extend the individual tax cuts, they shouldn’t put the country further in debt to do so. At a minimum, they should offset the revenue loss elsewhere in the budget.

That could involve, for example, re-thinking some of other provisions in the December tax package. Even this, however, would just be using offsets to avoid digging a deeper hole rather than to improve the fiscal outlook.

Brady’s plan raises some other concerns as well. One of its stated goals, for example, is to help Americans save for retirement. Yet the plan would enable parents to withdraw money early from retirement accounts when a child is born or adopted.

Families could “replenish” the retirement accounts later. But that would require extra savings in the future -- a likely challenge for the many people who already aren’t saving enough.

Creating alternative uses for money in retirement accounts is a slippery slope. No doubt lawmakers and lobbyists could come up with scores of other reasons why people should be allowed to raid their retirement accounts during their working years, but that would defeat the whole purpose of the accounts.

In addition, Brady’s plan calls for a new “Universal Savings Account” that would be “a fully flexible savings tool.” It reportedly would work like a Roth IRA but the money in it could be withdrawn without penalty at any time.

But that just sounds like a free-floating tax break, divorced from any sort of saving-related policy goal and likely to be of most use to people with larger disposable incomes.

House Republicans hope to vote on some version of Brady’s plan shortly before the fall election, but Senate passage is considered unlikely. And the plan, as presented last week, seems a long way from finished.

But regardless of whether the plan being put forward as a serious policy proposal or as political positioning, it is troubling to hear members of Congress discuss new deficit-financed proposals as if the rapidly growing national debt doesn’t matter.