Why debt from GOP tax cuts might impose a painful price

WASHINGTON (AP) — When House Republicans proposed their tax-cut plan last week, critics noted that it came with a towering price: It would swell the nation’s debt by $1.5 trillion at a time when the economy is already faring well on its own and a vast generation of retiring baby boomers threatens to strain the Social Security and Medicare programs.

President Donald Trump and Republicans in Congress argue that their plan, which would shrink the corporate tax rate and end taxes for most wealthy estates, would accelerate economic growth. It would do so, they say, by leaving more after-tax money for businesses to invest and to increase pay for their employees, who would then spend more and help invigorate the economy.

Kevin Hassett, chairman of the White House Council of Economic Advisers, has contended that the proposal to cut the corporate tax rate to 20 percent from 35 percent could, by itself, enlarge the economy by up to $1.2 trillion over the long run and eventually add $4,000 a year to average household income. Those claims were promptly dismissed as wildly optimistic by Democrats and many economists.

Adding to the government’s debts poses risks, too: More debt could drive interest rates up as the government competes with private borrowers for credit. It could also eventually require cuts to popular spending programs. And it might leave policymakers with less ammunition the next time a recession strikes.

For now, the American economy is already gliding along at a decent pace. Growth has come in at a solid annual rate of 3 percent or better in each of the past two quarters. Employers have added jobs for a record 85 straight months. Corporate profits are strong. And the unemployment rate is 4.1 percent, its lowest level in nearly 17 years.

All of which is why some analysts argue that big tax cuts aren’t needed now — even if they would help stimulate the economy, which is far from sure. Instead, policymakers and lawmakers could be capitalizing on good times to take a whack at the government’s surging debt — $14.8 trillion (or $20.5 trillion if you include including debts the government owes itself).

In a report last month, the International Monetary Fund concluded that many wealthy countries could afford to pare their deficits by raising taxes on the wealthiest without jeopardizing economic growth.

“We should be running surpluses when the economy is strong,” William Gale, co-director of the Tax Policy Center, wrote in a blog post after the tax plan was released last week. “The proposed tax cuts would add to an already unsustainable long-term fiscal situation.”

Mark Zandi, chief economist at Moody’s Analytics, says the cost of the Republicans’ proposed tax cuts would add considerably to the federal debt burden, which now equals 75 percent of U.S. gross domestic product, the broadest measure of economic output. By 2027, Zandi says, that burden would equal 97 percent of GDP with the tax plan and 87 percent without it.

“It’s an unsustainable debt path,” Zandi says.

The government runs a deficit when it spends more than it collects in taxes and a surplus when it takes in more than it spends. Government debts are the cumulative result of years of deficits and surpluses.