The GOP tax plan has been criticized on two grounds. First, it disproportionately benefits the rich at a time when income inequality is an economic, political and social concern. Second, the concept of a debt-creating tax plan is unwise and counterproductive.
It is the second that has drawn robust and diverse criticism from economists. The Penn Wharton Budget Model’s scoring model (assessing a range between a static and a dynamic score) concludes: “The House Tax Cuts and Jobs Act is projected to reduce federal tax revenues between $1.5 trillion (high initial return to capital) to $1.7 trillion (low initial return to capital). Debt rises by more, by about $2.0 trillion to $2.1 trillion, over this [10-year] period, due to debt services. By 2040, revenue falls between $3.6 trillion and $4.4 trillion, whereas debt increases by $6.4 trillion to $6.9 trillion.” Added debt after the budget window raises the potential that the bill will not comply with the Senate’s reconciliation rules. As for growth, the model confirms the past pattern — a brief surge in growth that fades. (“By 2027, GDP is between 0.4% and 0.9% larger than current policy in that year. However, this initial boost fades over time as more debt accumulates. By 2040, GDP is between 0.0% and 0.8% larger than current policy in that year.”)
Others agree that the debt accumulation essentially cancels out any economic benefit. Former Federal Reserve chairman Alan Greenspan argues, “We are premature on fiscal stimulus, whether it’s tax cuts or expenditure increases. We’ve got to get the debt stabilized before we can even think of those terms. … Economically, it’s a mistake to deal with sharp reductions in taxes now.” His warning can be understood as an admonition about both a growing mound of debt and the downside of using debt-creating tax breaks now, when the economy is humming along. If we face an economic downturn in the next couple of years, we’ll have fewer anti-recession tools at our disposal.
Meanwhile the Center for Budget and Policy Priorities finds:
Today’s tax debates are taking place in a substantially different fiscal environment than when past tax cuts were debated. Compared to 1981, when the Reagan tax cuts were passed, and 2001, when the Bush tax cuts were enacted, revenues today are lower and the debt held by the public is considerably higher, measured as a percent of the economy. …
And the budget outlook is vastly different, particularly compared to when the 2001 Bush tax cuts were being considered. In 2001, the federal government was running a surplus, the federal debt was shrinking, and large surpluses were forecast for the coming decade. Today’s fiscal outlook is the opposite: deficits are growing and the debt is projected to rise from today’s 77 percent of gross domestic product (GDP) to 91 percent in 2027, according to the Congressional Budget Office (CBO), due to rising health care and other costs associated with the retirement of baby boomers, as well as the significant ongoing costs of the Bush tax cuts.
Moreover, since CBPP doubts the child tax credit and the business expensing provisions will be allowed to expire, “the Committee for a Responsible Federal Budget estimates that continuing them after their expiration in 2023 would add roughly $400 billion to the cost of the bill over the decade. These additional costs and the associated debt service would boost the debt-to-GDP ratio to 99 percent by 2027.”
Understand what the GOP is up to here. In order to give enormous tax breaks to individuals and the wealthy, it will run up the debt, which effectively removes any economic benefit in the long term. Because bigger debt will require budget cuts (likely to affect the poor and middle class), it will further increase economic inequality. And finally, by running up the debt now when the economy is doing fine, we risk leaving ourselves without fiscal defenses when the next economic setback occurs. In short, the concept is fatally flawed — unless your intent is to reward rich donors.