Until we stop spending nearly 20 percent of GDP on health care, tax cuts won’t do very much good.
Can tax cuts exist in the era of the $20 trillion debt?
A better query asks: how do spending increases thrive in the era of the $20 trillion debt?
Investor’s Business Daily indirectly answered these questions in an editorial earlier this week.
“Even with an allegedly budget-busting tax cut, the federal government will claim a greater share of the nation’s economy in 2027 than it does today, and that share will be above the average for the previous 50 years,” IBD notes about Congressional Budget Office (CBO) estimates. “The only reason deficits continue to climb over the next decade is because federal spending is going up at an unsustainable rate.”
Indeed, recent economic history buttresses the thinking behind this forecast.
Prior to the Great Recession, federal spending stayed well below $3 trillion annually. It now exceeds $4 trillion. The period in between that witnessed the greatest rise in the federal debt in raw dollar amounts also, unsurprisingly, saw a massive increase in federal spending. Income taxes increased modestly during this period while revenues decreased massively before increasing and stabilizing.
The spending spike appears particularly acute in Barack Obama’s first years in office. The federal debt reached $10.5 trillion in 2008. The budget deficit expanded from $450 billion in the last year of the George W. Bush presidency to $1.4 trillion in the first year of the Barack Obama presidency. Federal revenues decreasing from $2.7 trillion in 2008 to $2.2 trillion the following year played a huge role in ballooning the deficit. So, too, did spending, particularly the Obama stimulus package. Outlays increased a half-trillion dollars over the same year-to-year period.
When revenues decline and expenditures increase, the treasury usually finds itself in the crimson part of the red.
The sequester agreement between Congress and the president essentially resulted in expenditures remaining flat at $3.6 trillion between 2009 and 2013. Revenues increased during these years, the interest rate on the debt went down (from 2.4 percent in 2008 to 1.4 percent last year), and the Iraq War came to a close. Deficits declined but the debt rose.
We cannot count on interest rates remaining low forever. And with saber-rattling in North Korea, and terrorists still about despite the decline of ISIS, the notion of another dramatic defense cut — spending for the Pentagon declined from $800 billion to $640 billion during Obama’s first term that coincided with the Iraq withdrawal — seems unrealistic. So, to cut taxes means to increase deficits and the debt unless Congress also cuts spending.
Trump’s proposed tax cuts will grow the economy. Each increase of one percent in growth adds about $160 billion to our GDP, which amounts to a corresponding $32 billion increase in federal revenues based on the government seizing about a fifth of GDP. Clearly, the amount recouped by the growth unleased by the tax cuts does not come close to replacing the revenue lost by the rate reductions.
Senate Republicans addressed this issue, perhaps unintentionally so, in linking the repeal of the individual mandate with the reform of the tax code. The former cuts spending by $338 billion over the next decade by relieving the federal government of Medicaid and individual-market consumers to subsidize. The latter, according to the CBO, subtracts $1.5 trillion from the treasury over the next decade as a result of the various rate reductions.
It’s not just that healthcare spending presents budget hawks with the most opportunities for cuts with more than a trillion dollars annually spent at the federal level. The out-of-control expenditures, involving individuals, insurers, businesses, and local, state, and federal government, gobbles up almost one in five dollars spent in the economy. Fifty years ago, healthcare costs constituted about one in fifteen dollars spent.
Notice a trend?
Americans feel so desperate for relief for the same reason that tax cuts cannot produce the same relief they once did because of the ongoing shift in the primary burden on citizens from government to healthcare. Healthcare devours $3.5 trillion this year. Federal taxes devour $3.6 trillion. About one in five dollars goes to government and about one in five dollars goes to healthcare (with some healthcare dollars going to government and some government dollars going to healthcare). Americans possess less discretion, less freedom as a result of this.
Americans welcome tax relief. But problems change with times. It’s not 1981. Healthcare consumes about as much of the economy as taxes do, with costs expected to reach $5.6 trillion — roughly the size of the American economy in 1989 — by 2025. If Republicans don’t do something now to curb healthcare costs, opportunities to cut taxes will soon not exist.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.