Federal debt has risen from 33 percent of GDP prior to the financial crisis to 75 percent today — an unprecedented level for this point in the economic cycle — and is projected to rise to 150 percent over the next 30 years as Baby Boomers retire if we don’t raise taxes significantly. Let’s not kid ourselves. Deficits matter.
In the GOP tax proposal, economic growth comes overwhelmingly from lowering the corporate tax rate from an uncompetitive 35 percent to a competitive 20 percent, while expanding the child tax credit does little more than add to the deficit. Senators Marco Rubio and Mike Lee’s proposal to raise the corporate rate from 20 percent to 22 percent to expand the child credit even further and to make it “refundable” against both income and payroll taxes, so that parents with no taxable income can take advantage of it, slows growth and adds to the deficit. That hurts our children.
The middle class largely receives $0.8 trillion in tax cuts over the next ten years from reducing tax rates ($1.1 trillion), increasing the standard deduction ($0.9 trillion), and expanding the child and family tax credits ($0.6 trillion), offset by repealing the personal exemption ($1.6 trillion) and increasing other taxes ($0.3 trillion).
The wealthy receive a $0.1 trillion tax cut over the next ten years from eliminating the alternative minimum tax ($0.7 trillion), reducing pass-through-income taxes ($0.6 trillion), and eliminating estate taxes ($0.1 trillion), offset by eliminating state-and-local-tax deductions and reducing other miscellaneous deductions ($1.3 trillion). One can quibble about whether it’s wise to shift taxes from wealthy red-state entrepreneurs to blue-state professionals, but the shift doesn’t contribute much to the deficit.
The JCT overstates the deficit created by the tax bill, chiefly from corporate tax cuts, because Congress requires it to use “current law” scoring. Current-law scoring assumes that corporations will eventually pay taxes on all offshore earnings, even though corporations have seldom repatriated offshore earnings. It also assumes temporary tax cuts will no longer expire once the bill replaces them with permanent cuts even though Congress has always extended them. These omissions may overstate the bill’s resulting deficit by $0.4 trillion or more over the next ten years.
While there is debate over the expected growth from corporate tax cuts, current-law scoring assumes no growth at all. The Tax Foundation, for example — an advocate of tax cuts — predicts corporate tax cuts will generate a trillion dollars of additional tax revenues from growth. The JCT estimates $0.4 trillion of additional tax revenues, largely from corporate tax cuts. With modest growth — growth that is more valuable than just the taxes collected — corporate tax cuts likely pay for themselves with real-world rather than current-law scoring.
The logic of the child tax credit, meanwhile, is to pay middle-class families for having children who will contribute to the future tax base — even though middle-class families consume about as much in government services as they pay in taxes. Reducing their share of the tax burden will only encourage them to demand more government services.
Only investment increases growth.
Some advocates of middle-class tax cuts also insist that spending these tax cuts will stimulate growth, but that’s far-fetched. Only investment increases growth.
If we borrow from rich investors to finance fiscal deficits, then investment must decline equivalently. Consumption increases at the expense of investment, which slows growth.
If we borrow from offshore lenders, then trade deficits must increase equivalently. At best, that produces a one-time increase in middle-class consumption of offshore goods, which stimulates the economies of offshore lenders and expands debt at the expense of our children. At worst, in a high-wage economy, like America’s, that sells higher-skilled labor and buys lower-skilled labor, middle-class workers lose income to offshore workers eager to save and finance America’s fiscal deficits.
Let’s not kid ourselves. If we don’t cut government spending, someone must pay for that spending, with taxes, slower growth, lower wages, and/or a diminished future. There’s no free lunch.
The Rubio-Lee amendment raises corporate taxes from what they otherwise would be to increase middle- and working-class tax cuts. That reduces investment, slows growth, and diminishes middle-class incomes in the long run. It leaves our children saddled with a smaller economy and more debt. And it incentivizes the middle class to demand more underpriced government services. The amendment may be clever politics given an unsuspecting electorate, but it’s a lousy trade.
— Edward Conard is an American Enterprise Institute visiting scholar, a former Bain Capital partner, and author of The Upside of Inequality: How Good Intentions Undermine the Middle Class.