Marc Goldwein: Debt Matters Even More After Tax Bill's Passage
Marc Goldwein is the Senior Vice President and Senior Policy Director for the Committee for a Responsible Federal Budget. He recently wrote an opinion piece for NBC News THINK. It is reposted here.
For the past decade, Republicans have warned us about the dangers of a rising national debt. Now that they have passed an estimated $1.5 trillion debt-financed tax cut, those deficit concerns seem to have gone out the window. And that’s a shame, because they were right to warn about the debt then, and they are even more right today.
Our national debt is already twice the historic average and higher than it has been at any time in history since World War II. Today, it consumes over 77 percent of the economy — and that share is rising every year.
Sadly, the tax cuts just passed by the Senate would make a bad situation worse. If signed into law, which it almost certainly will, the plan is slated to add more than $1.5 trillion to the debt; an increase in economic growth could, at best, counter one-third of that cost.
If we assume various expirations in the tax plan are ultimately extended, debt would exceed the size of the economy within a decade as a result of the bill’s passage. And if Congress also passes its usual slate of end-of-the-year giveaways, we could be facing trillion-dollar deficits by next year (fiscal year 2019).
With an aging population and rising health costs, debt is already rising unsustainably. Slashing tax revenue and increasing discretionary spending — which policymakers have signaled they plan to do — will only add fuel on the fire.
And ultimately, the consequences will be substantial. High and rising levels of debt slow economic growth, reduce fiscal space, erode generational equity and prevent thoughtful policymaking. And debt cannot sustainably grow faster than the economy, meaning any tax cuts or spending hikes allocated to today’s votes will ultimately be paid for by younger and future generations.
Often, lawmakers justify higher levels of debt by arguing their preferred policy — whether tax cuts, free college, or infrastructure — will grow the economy. But the truth is, debt itself pushes it in exactly the opposite direction.
For the government to borrow, they must find sufficient lenders. Sometimes foreigners purchase U.S. debt and sometimes Americans defer consumption in favor of saving their money in U.S. Treasury bonds. But often — about one-third of the time, according to the Congressional Budget Office — increased bond issuances will lead Americans to change their investment portfolio, diverting their savings away from productive investments and toward low-risk, low-return government bonds.
This is known as the “crowding out” effect, and over time it leads to less private investment, less capital stock, slower economic growth and lower future wages. For example, the Congressional Budget Office recently estimated that rising debt levels could reduce projected annual income by between $2,000 and $6,000 per person by 2040.
Lower debt is also important for the sake of fiscal space, or the federal government’s financial capacity to respond to crises. Before the last recession, debt was only half of what it is today as a share of the economy — allowing us to withstand increases in the debt that accompany rising unemployment and falling incomes and to adopt fiscal stimulus measures to boost the economy. Today, unfortunately, we’re just one recession away from reaching record-high levels of debt. It’s not clear how much capacity we’d then have to fight the next war or recession.
And ultimately, even without a disaster our fiscal space will start to run out. At that point, corrections will be needed in the form of much higher taxes, much lower spending, or likely both. Yet waiting to make these decisions not only means the adjustments will be larger due to compound interest, it inevitably means they’ll be paid largely or entirely by younger and future generations.
In other words, parents and grandparents get a tax cut and generous entitlement benefits today; kids and grandkids — many unborn — are stuck with the bill tomorrow. Make no mistake, that bill will come due.
And importantly, in addition to its economic dangers, the debt presents serious dangers for policymaking.
Even debt-loving fiscal doves support good government and an efficient budget and tax code. Yet with no budget constraint, such efficiencies will never be achieved. Why make careful choices when resources are viewed as unlimited?
It was the constraint of budget neutrality that led the Obamacare legislation (whatever you may think about the coverage side) to include important delivery system reforms within Medicare. And it was that same constraint that helped former House Ways and Means Committee Chairman Dave Camp to write a thoughtful, pro-growth tax reform plan in 2014 that rid our tax code of dozens and dozens of distorting and unwise tax breaks (by comparison, GOP plan repeals only one meaningful tax break).
This is a bipartisan issue. Without such constraints, every inefficient spending program and tax break would remain law regardless of its merits. And without concern over debt, the floodgates would open for policymakers to put forward expensive policy after expensive policy without regard to its need, its effectiveness, or its long-term consequences.
Shame on our current lawmakers for pushing an agenda to make the debt worse. But shame on any future lawmakers who use today’s irresponsibility as an excuse to push for more debt-busting bills and continue the race to the bottom.
This country needs more revenue, not less. We need to slow the growth of Social Security and Medicare, not expand benefits to those who don’t need them. And we need to carefully think about what tax breaks and spending programs are worth the cost. Otherwise, our economy, our budget and our posterity will all suffer.
"My Views" are works published by members or staff of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.