Extending Last Year's Tax Cuts Without Massive Spending Reductions Would Be a Fiscal Disaster
New CBO analysis shows debt could exceed 200 percent (!!!) of GDP by mid-century without changes.
Republicans in Congress are reportedly mulling a proposal to make permanent the tax cuts passed last year, with some members of the House GOP pushing for the passage of what's been called "Tax Reform 2.0" as soon as next month.
Currently, the lower individual and corporate income tax rates established by the Tax Cuts and Jobs Act of 2017 would expire in 2025. Extending them, according to a newly released analysis from the Congressional Budget Office (CBO) would cause the already terrifying trajectory of America's national debt to spike even higher over the coming decades—potentially doubling the size of the entire economy before 2050.
Under this so-called alternative fiscal scenario, current spending plans would remain unaltered but future tax revenues would be reduced by the permanent extension of the tax cuts. With the gap between revenue and spending already on pace to hit $1 trillion annually within a few years, it's not hard to see how reducing future tax revenue—without a commitment to seriously curb spending—could cause the debt to skyrocket.
At present, the national debt is expected to bump up against the record of 106 percent of GDP (a level reached at the height of World War II) sometime in the late-2030s. Extending the tax cuts without cutting spending would see that mark eclipsed by 2029, the CBO says.
"Lawmakers should not accept ever-growing federal debt as a share of the economy, nor make it worse by continuing deficit-increasing policies," advises the Committee for a Responsible Federal Budget, a nonpartisan think tank that favors balanced budgets. "They should take steps to slow and reverse its growth."
Instead, the CBO projections show the exact opposite happening, as the growth of the national debt is set to accelerate over the next decade.
Congressional Republicans never really intended for last year's tax cuts to expire, something that Speaker of the House Paul Ryan (R-Wis.) admitted even as the tax bill was still being debated.
"Those are sunsets that will never occur, we don't believe will ever occur, we don't intend to ever occur," he told the The Washington Examiner last year, adding that the temporary nature of several key elements of the GOP tax plan was meant to satisfy Senate rules that limit the extent to which bills can affect the long-term deficit.
Though Ryan was, in that instance, talking about a handful of tax credits—including one that rewards parents simply for having children—the same general logic applied to other parts of the tax bill, including the rate cuts for individuals and corporations. The lower rates passed by Congress last year are technically scheduled to reset to their previous, higher levels in 2025. Those expiration dates allow projections of the cost of the tax bill to appear lower because they took into account additional revenue from after the expiration dates.
Those gimmicks allowed Republicans to make the tax cuts look less bad for the deficit—though the bill was still projected to add at least $1.5 trillion to the deficit over the next decade.
Even if Congress allows the tax cuts to expire, as the CBO expects in its "current law" projection, the national debt is expected to spiral in future years without a serious effort at cutting spending. Things get really ugly in the alternative scenario, which envisions a future where Congress allows not only the tax cuts to expire, but also extends other planned tax breaks (including the politically popular tax break for parents) and permanently repeals some health care taxes tied to the Affordable Care Act.
This alternative future—one that actually seems more likely in many ways than the "current law" projection that relies on Congress making several sure-to-be-unpopular decisions in the middle of the next decade—would put "increasing pressure on the noninterest portions of the budget, limiting lawmakers' ability to respond to unforeseen events, and increasing the likelihood of a fiscal crisis," the CBO warns. The number-crunching agency concludes that "such a situation would ultimately be unsustainable."
Of course the real problem is Congress' inability to cut spending. After passing the tax cuts last year, Republicans earlier this year approved a two-year spending plan that obliterated Obama-era spending caps once championed by Ryan and other budget hawks. In doing so, the GOP has signaled quite clearly that it does not give a damn about the deficit—despite years of claiming otherwise as Presidents Bush and Obama added to the national debt. And if Republicans don't care about the deficit, why should Democrats?
But even a party that has abandoned fiscal conservatism should take a good, long look at the CBO's latest release before pressing ahead with a plan to put more tax cuts on the national credit card.