Tax reduction is the hotly discussed issue of the day, but almost no attention is paid to its most important effect.
If any tax bill were passed, it would add about $1.5 trillion to the federal deficit. Trillion.
The added deficit would have to be financed by borrowing, and the national debt would grow beyond its current level of about $20 trillion. The instant gratification of a tax cut will bring delayed pain for future generations. Today’s grandchildren get to pay the bill.
We know this, because Congress intentionally set it up to work that way. All Senate Republicans and all but 20 House Republicans voted for a phony federal budget authorizing the new deficit spending. A deficit increase cap would allow the tax bill to pass without a single Democratic vote in the Senate.
That meant a once numerous Washington bird has almost disappeared. When Democrats proposed deficit spending, the GOP opposed and fought to prevent any more debt. They became known as “deficit hawks.” With the exception of a couple of Republican senators who won’t run again, the hawks have flown.
This deficit game has led to even worse moves. To keep the total shortfall under the cap, the Republicans would make the corporate tax cuts permanent, but the much vaunted help for middle income taxpayers would only last five years. The GOP tax cutters say the middle income tax cut could be extended later.
If they are right and Congress later makes the middle class cuts permanent, the true deficit increase will be more than $2 trillion. In the meantime, corporations get priority over people.
Candidate Donald Trump promised to eliminate “carried interest,” a complicated tax break for the wealthiest. It survives, while deductions for state and local taxes would disappear. It looks like a cosmetic change to the loophole would be made, but the give-away to hedge fund bosses would remain.
How can this preference be justified? Tax cut advocates claim that reduced taxes will leave corporations more money to invest in expansion, thus producing more business activity and jobs, which in turn would produce more tax revenues. If this theory works, the tax cuts won’t add to the deficit.
There’s no way of knowing what corporations will do with more money and if their actions will boost tax revenues. Congressional experts look at the measurable tax cost, while tax cut advocates prefer “dynamic” studies, showing the hoped-for tax growth.
Both ways of looking at the effect of tax law changes are imperfect. Experts lack the tools to forecast accurately revenue gains from tax cuts, if any. Advocates feel free to sell their proposals by relying on unproven optimistic projections. The only known fact is that on Day 1, there will be massive growth in the federal deficit.
Congressional Republicans want to pass the tax cuts quickly for two reasons. President Trump had has no major legislative victories in his first year in office, and his party wants to hand him a win.
Also, GOP congressional candidates promised to kill the Affordable Care Act and to cut taxes. After failing to do the first, they want to produce a tax cut before the 2018 elections to show they keep their promises. Interestingly, polls show that many people don’t care about tax cuts.
To find money to keep the deficit within limits, the Senate bill would end the ACA requirement to buy health insurance, whose premiums are eligible for federal subsidies. No requirement to buy means no subsidies and more money for tax cuts.
That may be an incorrect calculation. Many people buy insurance because of the federal subsidy, not because of the mandate. Eliminating the requirement might not save as much as expected, if people keep drawing on the subsidy. The ACA proposal looks unlikely to survive.
Another major impact of the tax bill that has mostly been ignored is the effect on state taxes. Many states, including Maine, base their individual tax collections on the federal form. For example, the definition of taxable income may be the same.
The Maine Legislature at its session early next year may find itself faced with making big decisions about how much to carry into Maine law of what congressional Republicans and Trump may have enacted. The state is teeming with candidates for governor, so that should make for an interesting debate.
The bottom line is tax cuts would be financed by massively adding to the federal debt. Washington has plenty of coal to put in the grandchildren’s holiday stockings this year.