The Republican Tax Bill Likely Will Add to the Coming Explosion in the National Debt
Guest column: Dissembling political parties are guilty of adding to the eventual debt crisis.
Contrary to the partisan narratives of our two dissembling political parties, federal deficits and the national debt have been growing steadily since WWII through every administration, with the sole exception of the Clinton administration. The growing deficits have been the result of the federal government spending more and collecting less of our gross national output.
Democrats and Republicans like to do a lot of finger pointing about tax cuts and spending increases, but the historical record shows that since 1960 both parties have been gradually increasing spending and decreasing taxes thereby fueling our ever-growing national debt.
But what is even more troubling is that the Congressional Budget Office (CBO) says things are going to get much worse. According its estimates, federal deficits will steadily accelerate over the next decade, reaching nearly $1.5 trillion annually by 2027. The increases will be primarily driven by an explosion in the costs of Social Security, Medicare, Medicaid and interest on the national debt.
The cost of Social Security, Medicare and Medicaid has already risen from about $1 trillion in 2007 to $2 trillion today and now account for nearly half of all federal spending. The CBO expects their cost will rise to $3.6 trillion over the next ten years. Of the three, Medicare rises most, more than doubling. These increases are driven primarily by the fact that our population will grow significantly older in the next decade.
As much as conservatives like to rail about the cost of welfare programs, they only account for about seven percent of all federal government spending. And the CBO projects that welfare spending will be relatively flat over the next decade, rising only about fifteen percent. If we ended all welfare programs, it would barely dent the deficits the CBO foresees. And since about a third of welfare spending is on food stamps and school lunch programs, which are strongly supported by Republicans in agricultural states, large cuts are unlikely.
One of the CBO’s most chilling projections is the federal government’s future interest cost. Because of falling interest rates, there has been almost no increase in the government’s interest cost in the last ten years. But the CBO projects that the interest expense will more than triple by 2027 to over $800 billion because of the exploding deficits they expect in the next decade.
So, against this alarming forecast, what do the Republicans do? Well, cut taxes, of course. President Trump signed the latest tax reduction bill into law just before Christmas.
The Republican theory is that the cuts will spur economic growth thus increasing federal tax receipts. This so-called supply side theory was popularized by economist Arthur Laffer during the Reagan administration. The theory holds that there is a level of taxation that becomes so oppressive it begins to discourage the incentive to produce and thus retards economic growth.
The argument has a certain intuitive appeal, but exactly where the tipping point is and how other economic factors may affect its operation cannot be objectively proved. There is scant evidence in the historical record that the theory actually works. Republican mythology is that the Reagan tax cuts set off a halcyon economic revival. Those tax cuts actually resulted to the largest percentage increase in the national debt in our history (that’s right, Reagan increased the debt by a larger percentage than President Obama). The theory is also belied by the Clinton administration during which the deficits dramatically fell even though tax rates increased. Amid the George W. Bush administration, the country fell into a deep recession despite his tax cuts.
More globally, both as a percentage of Gross Domestic Product and in marginal rates, taxes have steadily declined since WWII. But, so has GDP. So, clearly, lowering taxes does not guarantee growth. (The GDP is the value of everything produced by the people and companies in a country, and is a standard measure of growth.)
Everyone agrees that if the recently passed Republican tax bill does not increase growth, it will add $1.5 trillion to $2 trillion to the national debt over the next ten years on top of the $10 trillion that CBO is already projecting. So, the Republican Party, like a desperate spendthrift in a casino, is making one last bet that supply-side economics will save the day. If the dice come up craps, they and the country are screwed.
They are making their bet against the consensus of independent economists who believe new tax provisions will come nowhere near paying for themselves. Economists polled by Bloomberg and the Chicago School of Economics overwhelming panned the bill. The Wharton School of Business, the president’s alma mater, has issued a study predicting it will add to the deficit as have the CBO, the Joint Committee on Taxation, the Committee for a Responsible Federal Budget, the Tax Policy Center and a host of other policy and watchdog groups. Some of these analyses foresee a short-term sugar high from the tax cuts, but none believe they will have a lasting effect on GDP growth in the long term.
We may get better economic growth whether the tax bill has any affect or not. The world economy is doing to better than many expected. Personally, I suspect that Trump’s campaign to roll back some of the regulatory burden may have more of an impact than cutting taxes.
But the long-term problem will persist regardless. Both political parties promote narratives to explain the structural deficit that resonate with their respective bases and each narrative contains a grain of truth. But while welfare queens and greedy corporations may contribute nominally to our federal deficits, they are principally driven by an aging population and the enormous medical expenses that demographic change will drive (think about the cost of Alzheimer’s care a decade from now). That is the real inconvenient truth that neither party wants to address because the solutions are hard, complicated and fraught with political peril. Much easier to just cut taxes for the donor class and promise voters ever increasing benefits. That may be expedient politics, but it will eventually bankrupt the country.
Bill King is a Houston businessman, attorney and former mayoral candidate. Opinions expressed by Texas Monthly guest columnists are their own.