Thanks to Rising Debt, Republican Tax Policy Is Now Anti-Growth
In the long term, deficit-financed tax cuts would be a drag on the economy.
At the beginning of 2017, Speaker of the House Paul Ryan (R–Wisc.) teased the GOP's tax cut legislation by promising that the eventual bill would be "revenue neutral" and not add to the deficit. When the bill came out later in the year, however, every single independent analysis, including those generally favorable to the overall goals of the legislation, found that it would raise the deficit, with most estimating an increase of more than $1 trillion over a decade.
Many estimates noted that the bill employed a number of gimmicks—in particular the expiration, in 2025, of all of the individual rate reductions—that artificially lowered the apparent deficit impact. In reality, the deficit increase would be far higher.
Republican leaders, however, dismissed these estimates, saying that economic growth spurred by the tax cuts would make up the difference. Nevermind that Republicans had made similar claims about the likely deficit effects of the tax cuts passed under George W. Bush, and those claims had proven wrong. This time would be different. As Ryan said last year while the tax plan was moving through Congress, "We believe that…with economic growth that gives us more revenue with where we need to be." The tax bill passed. The deficit increased, and is now on track to hit $1 trillion years earlier than previously expected.
Last week, congressional Republicans provided a strong signal that the analysts who warned of the tax law's deficit increase were probably right. The House GOP passed a follow-up bill making the individual rate cuts permanent. On paper, the bill scored as a $631 billion increase in the deficit. But that figure, too, is somewhat misleading, because it only accounts for the three years at the end of the 10-year budget window, after the 2025 expiration. Making the tax cuts permanent would raise the deficit by more than $3.1 trillion in the following decade, according to the Tax Policy Center.
Republicans in the Senate have signaled that the House tax bill probably won't become law this year. But it is reasonably likely that the individual rate reductions from last year's tax law will be extended before they expire, because neither Democrats nor Republicans want to be seen as allowing tax rates to increase for middle class families.
That has been the GOP's intention from the beginning. Last December, at an event promoting the tax law, Speaker Ryan made this explicit: Republicans did not want or expect those cuts to expire. "Those are sunsets that will never occur, we don't believe will ever occur, we don't intend to ever occur," he said.
And Republicans have once again dismissed concerns about the impact on the deficit while insisting that a second round of tax cuts would promote economic growth. Ways and Means Committee Chair Kevin Brady (R–Texas), a key figure in crafting GOP tax cut legislation, said making the tax cuts permanent was "important for growth and certainty." Larry Kudlow, the top White House economic adviser, has similarly defended tax cuts on the basis of promoting economic growth.
Once again, there is scant evidence to support the notion that economic growth would compensate for the deficit effects of a second round of tax cuts. On the contrary, there is reason to believe the opposite. Although the Joint Committee on Taxation (JCT) projects that making those tax cuts law would produce a modest growth bump in the next decade, it would not come close to offsetting the total deficit increase. Even accounting for that growth, it would still leave a deficit impact of about $545 billion by 2028. That is in addition to the impact of last year's tax law.
More importantly, the JCT projects that adding to the debt would likely raise interest rates, especially in the following decade, resulting in adverse effects on the economy. According to the JCT, after 2028, under a second round of tax cuts, "while employment will continue to be somewhat higher than projected under present law, investment and GDP will be lower than under present law, and the budgetary feedback from this effect will become negative." This is in line with a Penn-Wharton Budget Model analysis published earlier this year that found extending the individual tax cuts from last year's bill would add $5 trillion to the debt by 2040 "and actually reduces GDP during the first 10 years and beyond." Under the GOP's preferred tax plan, in other words, the economy ends up smaller than it would be otherwise.
Over and over again, Republicans have claimed that their tax plans will reduce the deficit by increasing economic growth. But the promised deficit reductions have never materialized, thanks in part to the fact that the GOP has repeatedly paired revenue-reducing tax cuts with federal spending increases. Just last week, in addition to the tax bill, the House GOP passed an $853 billion spending bill. Under Republican control, Congress added $2.4 trillion to the national debt during the 2018 fiscal year.
Going forward, rising debt and deficits are likely to become a significant burden on the economy, and should a further round of deficit-financed tax cuts occur, it will only increase the drag. Yet that is what Republicans say they want. The available evidence suggests that in the long term, Republican tax policy is now anti-growth.