The Republican overhaul of the tax code sets the stage for years of politically fraught debate over what the government should provide for its citizens and how much it should demand in taxes.
President Trump and Republicans in Congress are celebrating the $1.5 trillion legislation as a big tax cut for workers and businesses. And for the time being, it is that — 80 percent of the country will pay lower taxes next year.
But the short-term gains come with a cost: The legislation also makes the country’s debt problem even worse, in all likelihood forcing policymakers in coming years to make difficult decisions about spending cuts, tax increases or both.
The debate could touch on some of the most value-laden questions facing the nation — what type of financial security to provide the elderly, what safety net services should be offered to the poor, and how much the government should try to shrink economic inequality.
The challenging landscape is partly the result of choices Republicans made with their tax bill and partly the result of deeper economic forces in the economy. The GOP decided to cut taxes without offsetting spending cuts, driving up the deficit.
But the country is also going through a profound demographic Doshift in which millions of baby boomers are retiring from the labor force and joining the rolls of Medicare and Social Security.
The nation already owes $15 trillion to investors and foreigners. Even before the tax bill, the country was on track to hit $25 trillion in debt in the next decade, according to the Congressional Budget Office.
That would be the highest in modern American history. The tax bill adds another $1 trillion to $2 trillion to the total.
“We are just dooming ourselves to a larger tax increase or spending cuts in the future,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget. “At some point our leaders are going to look at our finances — or the markets will force them to — and say this is unsustainable.”
[The final GOP tax bill is complete. Here’s what is in it.]
Republicans are already previewing how they intend to address the debt. They say they are looking as soon as next year to begin an overhaul of the entitlement system — Medicare, Medicaid and Social Security — in hopes of limiting spending.
They are also seeking to target the safety net, pledging to curb eligibility in an effort to encourage people to seek work instead of relying on government assistance.
“We are going to focus next year on people. On getting people from welfare to work,” House Speaker Paul D. Ryan (R-Wis.) said Tuesday on the House floor.
The GOP is not unified on these questions. Trump promised not to touch Medicare and Social Security, two programs that are popular among his base of working-class white voters.
Democrats, meanwhile, say they expect to roll back significant elements of the tax plan if they gain power in the future. Democrats have taken issue with the plan’s disproportionate benefits for the wealthy and corporations.
House Minority Leader Nancy Pelosi (D-Calif.) went as far as to call the bill “Armageddon.”
“I think the problem with the bill is it increases deficits by at least $1 trillion, largely to finance a giant tax cut for the wealthy and corporations,” said Lily Batchelder, a tax law professor at New York University and former Obama administration official.
[Trump, at last, looks to notch a legislative win with tax bill. But can he redirect his presidency?]
Democrats might not have a chance to do so unless they recapture the White House in 2020, but there is precedent — President Obama and congressional Republicans agreed to end the George W. Bush tax cuts for the wealthiest Americans in a fiscal pact forged on New Year’s Eve, 2012.
Still, asking Americans to stomach spending cuts or tax hikes can prove difficult. Technically speaking the tax-cut legislation is supposed to trigger an equivalent amount of spending cuts under a congressional rule enacted in 2010 out of concern for the mushrooming federal debt. Congress is widely expected to waive the rule.
And while Republicans set a significant part of their package — tax cuts affecting individuals — to expire in 2025, to comply with a Senate rule limiting the impact of legislation on the deficit, they say their expectation is those tax cuts will be extended, bringing the price tag of the tax bill well beyond $1.5 trillion.
For the next eight years, however, the GOP tax bill itself gives the vast majority of Americans a tax cut. Only 5 percent will pay more next year, according to the nonpartisan Tax Policy Center’s analysis of the final bill, and most of those are people earning six figures who live in major cities like New York and San Francisco.
“It’s not the kind of disaster many in the media have made it out to be,” says economist Tyler Cowen of George Mason University. “There’s a good chance it will prove popular next year once people see their taxes go down.”
Whatever the future holds, it’s clear the GOP’s decision to increase the deficit to cut taxes breaks with recent precedent. Republicans started the year promising to fix America’s corporate tax code, but to do it in a way that was deficit neutral.
A big fiscal deal nearly achieved in 2011 by Obama and then-House Speaker John A. Boehner (R-Ohio) would have raised taxes while cutting spending — modeled after the bipartisan Simpson-Bowles Commission that had made similar recommendations.
Even President Ronald Reagan’s tax overhaul in 1986, which many Republicans regard as the gold-standard, was structured to be revenue neutral. The new GOP bill took a far different approach.
“The bill is very consistent with Republican ideology that the solutions are all in the private sector,” said William Gale, co-director of the Tax Policy Center and former staff economist at the Council for Economic Advisors under President George H.W. Bush. “Businesses, corporations and pass-throughs are getting big breaks at the ultimate expense of the government’s ability to address any of the pressing social or domestic issues.”
There’s widespread agreement that in the short term, the tax bill will grow the economy a bit faster, perhaps eclipsing a rate of 4 percent for a quarter or two.
The question is what happens after the initial bounce. Republicans argue that upswing will continue for many more years, as businesses invest more. If this projection proves accurate, it will alleviate many of the fiscal pressures facing the country, since economic growth itself will help stabilize the debt.
“I don’t think the tax bill pays for itself, but I’m not as concerned about deficit impact as others are,” says Glenn Hubbard, dean of Columbia Business School and President George W. Bush’s chief economist. “We need to raise productivity growth in the U.S. A tax cut on business income is a very big step in that direction.”
But if that optimism proves unwarranted, as many analyses predict, it could present a peril to the nation, especially if an economic downturn or a foreign policy crisis requires the government to step up spending.
“I thought it was bad enough we had debt at record levels,” says Goldwein. “But it’s going to get worse.”
Read more:
Will your taxes go up or down in 2018 under the new tax bill?
