With a final tax overhaul bill in hand, congressional Republicans say they have enough votes to pass legislation next week and deliver a major victory for themselves and President Trump by Christmas. But at what cost?
On paper, the tax package hammered out Friday carries a price tag of a net $1.5 trillion over 10 years. In reality, the cost in the form of federal deficits is virtually certain to be substantially higher.
That’s because of a bit of fiscal gamesmanship. Republicans agreed the tax rewrite could add up to $1.5 trillion in debt over 10 years. But to stay within that limit and add nothing to deficits beyond the decade, as a Senate budget rule requires, they put expiration dates of 2025 or earlier on almost all of the tax changes for individual taxpayers — but hardly any for corporations. The temporary breaks include the doubling of standard deductions and increases in the child tax credit.
But Republicans, including Trump, freely say that future Congresses will extend many of those tax cuts. Political pressure undoubtedly will be heavy to do so, though higher debt could inhibit future lawmakers. Nonetheless, Trump predicted Saturday that the tax cuts not only will be extended but sweetened.
"Whoever the administration is years from now, they will make it, and maybe even make it more generous if we can get the economy like it should be," he told reporters as he left for Camp David, Md.
Republicans are counting on something of a replay of what happened after President George W. Bush pushed through tax cuts in 2001 and 2003. Many of those had a sunset date of 2010, also to hold down the purported cost. Most were ultimately made permanent during the Obama administration, except some breaks for the wealthiest taxpayers.
Now, as then, supporters say the tax cuts will pay for themselves in spurring faster economic growth. But that is not the consensus of economists, and that did not happen after 2001. Congress’ nonpartisan Joint Committee on Taxation has estimated that the Senate tax plan, which is similar to the final bill, would shrink government revenue by about $1 trillion on net over the next decade after accounting for economic growth.
If many provisions do become permanent, experts say annual federal deficits could rise by hundreds of billions of dollars more over the 10-year period and swell even more in years beyond it. That would exacerbate what is already a grim debt outlook as public spending continues growing with an aging population, especially for health and retirement programs.
"The addition to the debt, taking what is already a significant problem and making it worse, is — it is of concern to me," Federal Reserve Chairwoman Janet L. Yellen said Wednesday at her last news conference as the central bank head.
Even without tax cuts, the Congressional Budget Office projected earlier this year that the national public debt, which has tripled from a decade ago to $15 trillion, would reach about 90% of the size of the U.S. economy by 2027; currently it is 77% of the gross domestic product. Extending the temporary tax cuts could push that ratio to 100% or higher if the economy were to falter, increasing the risks of surging interest rates, reduced private investments, and even a financial crisis down the road.
“They’re putting us in a pretty difficult situation. So either we’re going to have very bad fiscal problems, or tax cuts are going to go away and leave individuals with tax increases,” said Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at UC Berkeley. “The legislation is really very irresponsible.”
Although Republicans promote their plan as a tax cut for the middle class, their primary focus has been to slash the corporate tax rate. The final bill lowered that rate to 21% from 35%, starting next year. (Earlier versions had proposed a 20% rate, and Senate Republicans previously had the rate taking effect in 2019, to shave revenue losses.)
Partnerships and other so-called pass-through businesses, small and large, that pay individual tax rates would get a new 20% deduction on the first $315,000 of income. That could prompt employers and employees alike to reclassify their tax status, creating potentially billions of dollars of additional losses in revenue, according to tax accountants and lawyers.
For upper-income individuals, the top rate was lowered to 37% from the current 39.6%, and would kick in at annual income levels of around $500,000 for individuals and $600,000 for married couples.
The bill doubles the child tax credit to $2,000 and nearly doubles the standard deduction, boosting it to $12,000 for individuals and $24,000 for couples, while doing away with personal exemptions. Raising the standard deduction is expected to drive many taxpayers from using personal deductions, some of which have been eliminated, simplifying tax preparation for many — a key part of tax reform.
But these and many other changes in the tax code for individuals have expiration dates. A more generous deduction for medical expenses is allowed just for tax years 2017 and 2018. Most other individual tax benefits, as well as new limits, would sunset in 2025.
Starting next year, individuals will not be able to lower their tax income by deducting interest on home equity lines of credit or forgiveness of student loans. People will not be able to deduct as much of their mortgage interest and state and local taxes. But these restrictions also would be lifted after 2025, meaning that taxpayers could return to getting larger deductions for these expenses.
If the temporary tax cuts lapse, many people will see their taxes rise by 2027, particularly those with incomes less than $75,000.
If the provisions are extended, the true cost of the Republican tax plan would be closer to $2.3 trillion in the first decade if interest payments for debt are included, according to estimates of the Senate plan by the Committee for a Responsible Federal Budget, a nonpartisan advocacy group.
With the tax benefits skewed to corporations and wealthy Americans, “people are so concerned about the distributional effects of the plan” for lower- and middle-income taxpayers, said Marc Goldwein, the group’s senior policy director. “But what about the generational distribution effects?”
“This tax cut is almost by definition a tax cut for today’s adults and seniors, and a tax increase on today’s children and those that have not yet been born,” Goldwein said.
Scott Greenberg, a senior analyst at the conservative Tax Foundation, said concerns about the effects from rising debt are overstated. With the dollar as the world’s reserve currency and a global glut in savings, he said, there’s no shortage of foreign money available to buy U.S. debt. Also, even as federal deficits have surged in the last decade, Treasury bonds and interest rates more broadly have remained at low levels, he said.
But Greenberg is worried about the freewheeling way in which lawmakers are making budget policies. The Senate budget rule, for example, was supposed to impose fiscal responsibility, yet Republicans circumvented it with their $1.5-trillion debt allowance and expiration dates.
“My biggest concern is [we’re] entering a period in American policymaking where lawmakers on both sides of the aisle have less concerns for deficits than they have historically,” he said. “It might be easier now for Democrats, when they’re in control of Congress, to plan deficit-financed programs.”
Republicans have long complained about rising federal debt, leaving analysts stunned by how they have rallied around — and rushed to embrace — an expensive tax bill that polls have found to be unpopular with much of the public.
Yet cutting taxes has long been a Republican mantra, supplanting deficit reduction as the top fiscal priority as far back as the Reagan era. Especially after their failure in killing Obamacare, GOP leaders have seen it as essential to notch a major legislative victory for their own political survival in the 2018 midterm election.
But here, too, they might be miscalculating. Some of the largest tax cuts in American history, including the packages approved in 1948 and 1986, didn’t avert big losses for congressional Republicans in the next election.