The United States' debt topped $20 trillion for the first time ever in September. If some Republican senators get their wish, it will grow even more.
Senate Republicans have tentatively agreed to a budget deal that would allow them to pass a $1.5 trillion tax cut. The catch is they aren't proposing spending cuts or tax increases elsewhere to pay for it. That means the nation's debt could increase by $1.5 trillion or more over the next decade.
“It's an astronomical amount, given how bad our current debt is,” said Maya MacGuineas, head of the Committee for a Responsible Federal Budget, a nonpartisan watchdog group that's trying to reduce the debt.
The deal is even more remarkable, given that Republicans railed for years about how much money President Barack Obama (and President George W. Bush before him) added to the debt. It went up $4.4 trillion under Bush as the United States spent heavily on the wars in Iraq and Afghanistan, and $9.6 trillion under Obama as the nation spent money to try to reignite the economy after a severe recession and crisis.
Senate Majority Leader Mitch McConnell (R-Ky.) has repeatedly called the debt “unsustainable” and “alarming,” even going so far as to say in 2013 that it “makes us look a lot like Greece.” Yet McConnell was the one who held the meeting in his office to broker the red-ink deal.
McConnell isn't the only lawmaker about to do a flip-flop if this budget passes. Just last week, Sen. David Perdue (R-Ga.), a member of the Senate Budget Committee, said, "Washington has got to wake up. This debt crisis is well past the tipping point and it is directly impacting our ability to fund our priorities." Now he is on the verge of voting for a deal to exacerbate the problem.
Some GOP senators, including Patrick J. Toomey (Pa.), say it won't be a problem because tax cuts will pay for themselves. He argues that slashing taxes on businesses and individuals will “cause the economy to surge” as people spend so much more in the United States. If that happens, it should generate more tax revenue for the government, Toomey says.
But history — and a lot of unbiased research — doesn't back that up. As Goldman Sachs spelled out in a research note this week, the general rule of thumb is that tax cuts generate a short-term economic boost that's enough to reduce the total cost of the tax package by 10 to 20 percent. So that's about $300 billion on a tax package the size the Senate is seriously discussing.
“There is virtually no evidence that these tax cuts pay for themselves,” MacGuineas said. “That is wishful thinking.”
Even the conservative Tax Foundation concluded that a similar plan to the one the Senate is looking at wouldn't fully pay for itself. For a while, Republican leaders such as McConnell and House Speaker Paul D. Ryan (Wis.) seemed to understand that the math doesn't work to do tax cuts without paying for them. They spent the spring and summer talking about wanting to do “tax reform” instead of just “tax cuts.”
True reform is what President Ronald Reagan and many Democrats and Republicans in Congress did in 1986. It means paying for any tax cuts by eliminating spending elsewhere in the budget or getting rid of some credits and deductions used to reduce business and personal tax bills. To put that another way, some people and businesses would have to pay more under a reformed plan. What the Senate is pitching now looks a lot more like a classic tax cut, not real reform.
"We’re not psychologically or institutionally capable of doing a major successful tax reform now," says Tyler Cowen, an economist at George Mason University.
Business leaders — the very people who stand to gain a lot from any tax cuts — aren't pleased with the idea of adding to the debt. The Business Roundtable, a group of more than 200 top executives headed by JPMorgan Chase chief executive Jamie Dimon, has been calling for a “fiscally responsible” tax bill.
Federal debt has risen to 77 percent of gross domestic product, the measure of entire U.S. economy in a year. That's the highest level since shortly after World War II, according to the nonpartisan Congressional Budget Office, and it's expected to rise in the coming years.
When tax cuts aren't paid for, it hurts growth in the long run. The government has to spend more money to pay back the debt (and the interest on the debt), and it encourages investors to buy government bonds instead of putting that money to work in the real economy by starting businesses or making loans to other people who will start businesses. The interest payments alone on U.S. debt are going to triple in the next decade, according to the CBO. That's before adding an additional $1.5 trillion in debt.
This is a Senate deal. House Republicans may not go along with it. GOP representatives put out their own budget blueprint last year, “A Better Way,” which insists on revenue-neutral tax reform that wouldn't add to the debt. Over the summer, the House Budget Committee tried to stay true to that vow. The panel voted in favor of a plan that does rely on some accounting tricks, but is a lot closer to being paid for than what the Senate is talking about, watchdog groups say.
Getting the votes in the House for a $1.5 trillion unpaid tax bill would be tough. The chamber has the vocal House Freedom Caucus, a group of more than 30 representatives, that has pushed hard for a balanced budget and expressed wariness over a tax plan that would add to the national debt.
“Is the bill being written behind closed doors because it will only help the connected class and their high-paid consultants?” Freedom Caucus members Jim Jordan (Ohio) and Mark Meadows (N.C.) wrote in an op-ed this week. “The House Freedom Caucus wants government to operate on a budget, preferably a balanced one.”
Republicans in Congress are taking the unusual step of passing a budget first, before the details of an actual tax plan are worked out. So they just have to specify the size of the tax cuts now. Then they will come back later this year to enact the details of the tax plan. What the Senate is saying this week is that tax cuts could add as much as $1.5 trillion to the debt. It could end up being less, but most think that's unlikely.
“This proposal fails the test of fiscally responsible tax reform,” said Michael A. Peterson, president of the Peter G. Peterson Foundation, another watchdog group focused on controlling the debt.