President Trump says the economy needs a tax cut. The national debt screams that it needs more revenue.
Can the federal government slash rates and pay down the debt?
Spending at 23 percent of GDP and revenues at 19 percent of GDP adds up to a deficit of $700 billion. A best-case scenario by the Congressional Budget Office (CBO) sees an average increase of $300 billion to the annual deficit over the next decade as a result of the tax cuts. That means $1 trillion deficits as far as the eye can see.
But some eyes see better than others, and none can see the future with precise accuracy.
Gary Cohn, President Trump’s chief economic advisor, ambitiously holds, “We think we can pay for the entire tax cut through growth over the cycle.”
Historical antecedents buttress and undermine Cohn’s argument.
When Ronald Reagan entered office in 1981, federal revenues approached $600 billion. By the time he exited office, after slashing top rates from 70 percent to 28 percent, federal revenues approached a $1 trillion. The tax cuts indeed proved a boon to Uncle Sam’s coffers. Unfortunately, federal spending exploded, too, and so did deficits.
Following John F. Kennedy’s posthumous tax cuts, a booming economy boosted federal revenues. But similar to the experience of the 1980s increases in defense and other spending led to ballooning deficits.
In the 1920s, during the implementation of Andrew Mellon’s tax plan cutting top rates from above 75 percent to below 25 percent, government revenue did not increase by any consistent or discernible measure from year to year. But the federal government uniformly ran surpluses.
The common denominator between these three tax-cutting decades involved explosive economic growth. The big difference between the 1920s, 1960s, and 1980s, on the one hand, and now, on the other, involves deficits. Donald Trump inherited a massive one. Calvin Coolidge came into office after several years of surpluses. Vast fluctuations between surpluses and deficits prefaced the Kennedy cuts. The deficits preceding Ronald Reagan’s presidency appeared quite low relative to what preceded and followed. It’s neither the 1980s, the 1960s, or the 1920s.
The late Wall Street Journal editorial page editor Robert Bartley, though buying into the Laffer Curve that holds that lower rates can yield higher revenues, regarded the claim that supply-siders simplistically believed that any tax cut unleashed growth and thereby increased revenue as a strawman (some supply-siders ultimately came to embody the strawman). “My own guess has always been that the tip of the curve lies around a marginal rate of 35 percent, that making allowances for state and local income taxes the 28 percent top rate reached in 1986 was a pretty good approximation,” Bartley wrote in his classic study of Reaganomics The Seven Fat Years. “High income taxpayers pay the highest marginal rates, so we would have expected increased revenues from this group. This is in fact what happened.”
So, while Trump’s rate resembles Bartley’s ideal, Cohn’s notion that growth alone recoups the revenue lost from the rate cuts probably does not pass muster. Something more — reduced spending — needs to accompany the tax cuts to ensure the deficit does not balloon.
Our national debt now exceeds $20 trillion. At no point during the 1980s celebrated by Bartley but derided as irresponsible by deficit hawks did the federal balances swing out of whack by more than $255 billion. Reagan left office with Uncle Sam owing less than $3 trillion. Less than ten years ago, the debt stood at $10 trillion. Ten years from now it likely exceeds $30 trillion. Today, it eclipses the size of the U.S. economy, which means that even if all Americans contributed the entirety of their earnings to pay down the debt over the next year the feds would still owe their creditors.
But, of course, nobody in power seriously pushes the idea of any paydown of the debt — let alone the draconian, nightmarish scenario outlined above. But cutting taxes without a corresponding cut in spending appears likely to make a horrible problem worse even as it proves beneficial with regard to growth. The interest expense on the debt — nearing a quarter trillion in 2008 and only approaching $300 billion this year — remains low because of the lowering of interest rates. But if rates today approximated rates in 2008 the cost of servicing the debt would increase by about $200 billion.
What happens if rates go up? The American economy goes down. This, among other factors, makes running deficits of this size dangerous. Carrying a debt greater than the GDP makes sense during a national emergency such as World War II. But to do so during peacetime as standard operating procedure represents a departure from the norm — and sanity.
The proposed cuts look like a good idea in and of themselves. Without corresponding cuts in programs, the cuts may lead to an even more massive debt, which, like past debts, serves as a rationale for future tax hikes.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.
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