Dec 20, 2017

How the tax bill adds to the debt headache

The GOP tax bill cuts taxes by $1.5 trillion over the next decade and will accelerate growth of the federal debt under any forecast.

Reproduced from the Committee for a Responsible Federal Budget; Chart: Axios Visuals
Reproduced from the Committee for a Responsible Federal Budget; Chart: Axios Visuals

The bottom line: Expect Republicans to defend these tax cuts while Democrats step up a defense of government spending — particularly if Republicans turn next to welfare reform next year. But at some point, a reckoning is coming, and the only way to raise taxes or reform popular government programs is to do it on a bipartisan basis, which isn't how things have been working in Washington.

Congressional Republicans, most of whom are self-described budget hawks, are set to today pass into law a tax cut bill that will add between $1.5 and $1.7 trillion to the federal deficit when taking into account both economic growth and expirations no one expects to take effect, according to the Committee for a Responsible Federal Budget, a group that favors shrinking the deficit:

  • Looking ahead, this worsens the country's fiscal outlook, but it was going to be a problem regardless.
  • Entitlement spending is set to balloon in the near-term future as baby boomers hit retirement age and their Medicare and Social Security benefits kick in.

What happens next, part I: Democrats are enraged by the Republican process on tax reform. They'll fight back if they retake control of Washington:

  • "Democrats are going to have to rejigger their internal process and forget about being the only party that believes in responsible government, because we can't take much more of this massive assault on domestic spending," said Jim Manley, a former aide to Democratic Senate Leader Harry Reid.
  • And while House Speaker Paul Ryan has said he wants to do entitlement reform next year, most people say this is highly unlikely to be successful.
  • "I don't see the political environment in 2018 supporting something like this," said Doug Holtz-Eakin, president of the American Action Forum, and a Republican economic adviser.
  • That also means a $1 trillion-dollar infrastructure package is unlikely to happen next year.

What happens next, part II: At some point the growing deficit will have to be faced, and whether that's future tax increases to raise revenue, or entitlement reform to decrease spending, it's going to be very difficult to pull off.

  • "In order to meet the criteria of not increasing poverty and hardship … there will have to be a mix of increased revenues as well as a mix of" decreased spending, said Sharon Parrott of the Center on Budget and Policy Priorities, a left-leaning group. And pulling that off will "require a different policy-making environment."
  • "It's the hardest problem," Holtz-Eakin told me.

Bottom line: "We're not going to make it 10 years. Somewhere, someone's going to have to do it ... With or without tax reform, this was in the cards," Holtz-Eakin said.

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