With many of the 2017 Trump tax law’s provisions set to expire at the end of 2025, Senate Republicans are considering both extending these provisions and enacting an additional $1.5 trillion in tax cuts. A new report released today from the nonpartisan Congressional Budget Office (CBO) finds that, in the long run, enacting this set of tax proposals without paying for them would lower real economic output per person: The CBO finds that by 2055, the gross national product (GNP) per capita would be more than $4,000 lower in 2025 dollars under the Senate plan, leaving Americans meaningfully poorer on average.
In fact, the Center for American Progress finds that the loss in earnings would eventually more than fully cancel out any financial gain from a tax cut for American households on average, leaving them worse off than if the tax cuts were allowed to expire on schedule. In other words, this plan would lower after-tax income in the long run, reducing income more than it would reduce taxes.
At the same time, extending these tax cuts would push up interest rates, making consumer borrowing more expensive for things such as car loans, student loans, credit cards, and mortgages. According to the CBO:
The average interest rate on federal debt in 2055 equals 4.0 percent, 0.3 percentage points higher than in CBO’s extended baseline. Real GNP per person is 3.3 percent lower in 2055 than in CBO’s extended baseline (or $4,375 lower, in 2025 dollars).
Even without these new policies, debt as a percentage of the gross domestic product (GDP) is on track to reach 156 percent by 2055. The CBO finds that the combination of extending the expiring Trump tax cuts plus enacting an additional $1.5 trillion of tax cuts would instead leave debt at 220 percent of the economy by 2055—63 percentage points of GDP higher.
The House Republicans’ approach differs from this, calling for $4.5 trillion in tax cuts, partially offset through cuts to Medicaid and food assistance. Their approach would still increase deficits by roughly $3 trillion over the decade. While the CBO did not model that exact set of policies, if it did, the CBO would find similar results: lower wages, higher borrowing costs, and more debt.
With many of these tax cuts set to expire, Congress is facing a choice on setting the fiscal trajectory of the United States. Enacting this tax plan would lower Americans’ wages, raise their borrowing costs, and worsen the nation’s debt trajectory. As this analysis from the CBO indicates, a bad tax package would leave Americans with lower after-tax incomes than if the 2017 tax law were to expire on schedule.
Methodological notes
The CBO’s analysis today shows that the real GNP would be lower under the Senate Republican tax plan without any offsets. This model relies on a causal mechanism wherein lower productivity leads to lower economic growth. Under the CBO’s macroeconomic models, lower productivity also causes a drop in real wages.
In the long run, both the drop in GDP and the drop in real GNP per capita—and, therefore, under the CBO’s model, also nominal GNP—times one minus the average effective tax rate is meaningfully larger than the cost of the Senate Republican tax plan as a percentage of GDP, and the proposed tax plan gives a disproportionate share of its gains to the richest Americans. The loss in real income is therefore larger than the tax cuts for the American households on average.
The author would like to thank Colin Seeberger, Madeline Shepherd, Lily Roberts, and Shannon Baker-Branstetter of the Center for American Progress for helpful thoughts and suggestions.