Congressional Republicans are in the midst of drafting filibuster-proof legislation that would provide tax giveaways for the wealthy while simultaneously instituting deep cuts to basic services on which Americans rely. A new Center for American Progress analysis finds this legislation—even with the largest cuts in history to Medicaid and the Supplemental Nutrition Assistance Program (SNAP)—would significantly increase federal debt, leaving the economy weaker and American households worse off.
Why is growing federal debt harmful?
According to the nonpartisan Congressional Budget Office (CBO), increased federal debt would crowd out private investment while raising interest rates. Under the CBO’s models, each percentage point increase in debt/gross domestic product (GDP) would increase federal interest rates by 0.02 percentage points, which in turn would push up interest rates throughout the economy. A 50 percentage-point increase in debt/GDP therefore would lead to interest rates that are 1 percentage point higher.
This interest rate increase would, in turn, harm consumers—particularly those with low or moderate incomes—by raising the interest rates on their mortgages, credit cards, car loans, and student loans. It would also increase the cost of loans for countless American businesses, meaning new capital investments such as buying new equipment or renovating space would cost more to finance. Higher financing costs for new business investment would push up the costs of new goods and constrain supply over time, leading to higher inflation. The higher financing costs for new business investment would also decrease the productive capacity of the U.S. economy, lowering wage growth and sapping Americans’ earnings. Inflation would be further increased by the rise in aggregate demand resulting from higher budget deficits and thus higher debt.
The congressional Republican reconciliation plan would significantly worsen the nation’s fiscal trajectory
Deficits happen when revenue is lower than spending. A dollar of lost revenue adds as much to the deficit as a dollar of increased spending. The same is true of the debt, which is equal to the cumulation of annual deficits. The current fiscal trajectory is unsustainable. The U.S. debt level as a percentage of GDP is historically high and on track to rise indefinitely, with significant upward pressure. Reconciliation plans from both the House of Representatives and the Senate would make the situation much worse, leaving the country on an even more unsustainable path.
House Republicans are proposing legislation that would reduce federal taxes by $3.8 trillion over 10 years, with a disproportionate share of tax breaks going to the wealthy. The legislation would partially offset that revenue loss with reduced spending of $1.1 trillion over 10 years—$1.5 trillion in spending cuts that include deep and harmful cuts to nutrition assistance and health care for low-income households, offset by roughly $320 billion in spending increases for defense and immigration enforcement (numbers do not add due to rounding). However, all the tax and spending changes would, together, increase the federal debt by $2.7 trillion by the end of the period, even before accounting for interest. And this increased borrowing would add an additional $579 billion in interest costs. Federal debt would rise to a hefty 125 percent of GDP by 2034. By 2055, the legislation would cause federal debt to rise to 178 percent of GDP, a mammoth level. In contrast, absent these changes, the federal debt would reach 156 percent of GDP in 2055 under current law. (see Figure 1) The legislation’s increased debt would sap wage growth enough over time to leave Americans on average poorer than they otherwise would be.
However, although many of the tax provisions are made permanent, House Republicans wrote some of them to expire before the end of the 10-year budget window—despite planning to eventually extend those provisions—thus achieving an artificially small cost estimate. If those provisions were to instead continue indefinitely, the House Republican bill taken as a whole would add $4.5 trillion to the deficit over the decade. In addition, interest costs would increase by $755 billion over 10 years. The net effect of the bill with all expiring provisions instead assumed to continue would leave debt at 130 percent of GDP by 2034 and at 203 percent of GDP by 2055.
Senate Republicans have contemplated a similar scenario but with additional tax breaks totaling roughly $5.3 trillion, with $1.2 trillion in net spending cuts: $1.5 trillion in harmful spending cuts to basic services, offset by $350 billion in new spending initiatives on defense and immigration enforcement. The Senate proposal would make the tax giveaways permanent. Under the Senate plan, debt would increase roughly $4.1 trillion over 10 years before accounting for interest payments, plus an additional $680 billion in interest payments. This would cause debt to reach 129 percent of GDP by 2034 and 200 percent of GDP by 2055. The Budget Lab at Yale has estimated that increasing noninterest deficits by 1 percentage point of GDP—an amount roughly equivalent to that of the Senate proposal—would result in higher mortgage interest payments equivalent to between $600 and $1,240 per year in today’s housing market. As under the House plan, the increase in debt would sap wage growth, leaving Americans poorer than they otherwise would be.
The “current policy” baseline is a fiscal gimmick
Roughly $3.8 trillion of the $3.8 trillion to $5.3 trillion in tax cuts that congressional Republicans are considering arise from extending expiring provisions of the 2017 tax law signed by President Donald Trump. Senate Republicans have argued that extending the tax breaks in the Trump tax law would be costless. They argue that, rather than measuring against the statutorily mandated “current law” baseline, the cost of extension should be measured against a “current policy” baseline. This, however, creates a mirage of fiscal responsibility.
Under a current policy baseline, tax policies that are extensions of current law would be measured as if current law continued into the future, whereas under the statutory current law baseline, the tax changes are assumed to expire as stipulated in statute. Therefore, the cost of extending the tax policies is zero if a current policy baseline is employed. This treatment has many problems associated with it, the most important of which is inconsistency. When the Trump tax law giveaways were originally enacted, tax breaks were deliberately sunset in order to keep the cost of the legislation within a target set in the budget resolution. To turn around now and argue that the cost of extending giant giveaways is zero would create a scorekeeping inconsistency that no program in the budget receives—and would be unprecedented in the more than 50 years that the Congressional Budget Act has been a law. There is some bipartisan agreement among members of the House that this is a gimmick. For instance, Rep. David Schweikert (R-AZ) said earlier this year, “Anyone that says current policy baseline is engaging in intellectual and economic fraud, because it’s intellectually lazy. My basic mission in life is just to try to create some honest math.”
Nonetheless, even the sleight of hand of using a current policy baseline cannot obscure the fact that the increase in debt by the end of the 10-year period resulting from congressional Republicans’ plan to extend the expiring tax giveaways is $3.8 trillion (excluding interest), not zero. No amount of rhetoric or hand-waving can erase the fact that letting these tax breaks continue would lead to significantly higher debt than if they were allowed to expire on schedule.
Dynamic scoring does not change the result
Some congressional Republicans argue that the estimates of the impact of their tax legislation should utilize dynamic scoring. Dynamic scoring refers to estimates of the fiscal impact of a piece of legislation that take into account the changes in the macroeconomy that would occur if the legislation were enacted. To that effect, 32 House Republicans wrote and signed a letter in which they argued that their tax legislation would generate so much additional economic activity that the dynamic boost would offset $2.5 trillion in cost. However, while some estimates indicate that the macroeconomic boost of tax cuts would offset a small portion of their cost, the nonpartisan, independent Committee for a Responsible Federal Budget found that experts who produced dynamic score estimates projected that the tax cuts would not come remotely close to fully paying for themselves. (see Figure 2)
In fact, the CBO estimated the 10-year cost estimate of extending the Trump tax breaks would be more expensive, not less expensive, if their macrodynamic effects were incorporated into the score. Even using the macrodynamic impact on the cost estimates derived from the numbers in Figure 2, forecasts of the increase in debt by the end of the next 10 years resulting from fully extending the expiring provisions of the Trump tax cuts range from $3.4 trillion to $4 trillion, where a full extension would cost $3.9 trillion under a conventional cost estimate.
Conclusion
While it may quiet some of the deficit hawks’ discomfort to pair these tax giveaways with more than $1 trillion in harmful spending cuts, such a bill would still be deeply irresponsible fiscally. It would also take away critical support from low-income Americans. Even with enormous spending cuts, the proposal would still increase federal debt by many trillions of dollars over the decade. This would increase borrowing costs for households and businesses, lower wages, increase inflation, and crowd out private investment, leaving all but the very richest Americans worse off.
The author wishes to thank Bobby Kogan, Emily Gee, Colin Seeberger, Madeline Shepherd, and Shannon Baker-Branstetter for their many helpful comments and additions.
Appendix
The definition of federal debt used in this article is “debt held by the public,” which does not include debt resulting from intragovernmental transfers, such as debt owed by the U.S. Treasury to federal trust funds. Another definition of debt is “debt subject to statutory limit,” which primarily differs from “debt held by the public” because it includes debt resulting from intragovernmental transfers. But economists are in agreement that “debt held by the public” is a much more economically sound measure of debt than “debt subject to statutory limit.”
The figures in this article for the House reconciliation plan follow the committee-reported legislation. Figures for the Senate plan follow what independent reporting has indicated the Senate intends to do.