Trump tax cuts will boost the deficit, not the economy

As the Republicans squabble over the final details for their proposed tax plan, the Democrats, not surprisingly, are already savaging it. Senate Minority Leader Chuck Schumer called it “wealthfare” for the rich. Nancy Pelosi, minority leader of the House, said the American people do not want “one penny more in deficit-exploding tax breaks for the wealthiest one percent.” These are the standard Democratic criticisms.

But no one has laid out the real cost of the tax cut: that it will hurt our children.

The Trump administration swears that the tax cut will neither benefit the rich nor increase the budget deficit. But the Democrats are right; both claims are blatantly false. The Urban-Brookings Tax Policy Center estimates that under this plan “the federal debt would rise by at least $7 trillion over the first decade and by at least $20.7 trillion by 2036,” and that “the largest benefits, in dollar and percentage terms, would go to the highest-income households.”

Increasing the debt increases interest payments on the debt. These interest payments will be a burden on future generations. The key question, rarely asked, is what benefit justifies this burden?

The “benefit” is that we are boosting the income of the top 1 percent of U.S. taxpayers. Why? Have our richest suffered losses in recent decades? No, their income has skyrocketed. In 1980, the richest 1 percent earned around 9 percent of U.S. income; by 2016, their share had risen to 22 percent and their average income was $1.4 million. Is it fair to force our children to top up the income of the wealthiest Americans?

Perhaps an even more central question is, why cut taxes when the federal debt is already projected to increase over the next decade by $10.1 trillion according to the Congressional Budget Office? The main reason for this increase is growth in entitlements – Social Security, Medicare, Medicaid and health insurance subsidies. Even without a tax cut, our children will be forced to contribute to current beneficiaries of these programs. Should future generations be required to pick up even more of this tab? I bet most of you would say no.

So why is President Trump pushing for a tax cut now? He has claimed it will provide “rocket fuel” for our mired economy.

Trump’s words must have come as a surprise to the Federal Reserve. They’re worried there is too much rocket fuel already. Because of the steady job growth in recent months, and the continued strengthening of the labor market, the Fed has concluded that increases in spending are likely to trigger inflation. Responding to this danger, our central bank announced on Sept. 20 that it will be gradually pushing up interest rates to avoid inflationary spending increases. To the extent that the Republican tax cut stimulates spending, the Fed will act to offset that increase by additional boosts in interest rates. Raising the interest rate depresses private domestic investment, e.g., business spending on plants, equipment, research and development. Decreasing domestic investment reduces the productivity of our labor force, another drag on future generations.

To sum up, the Fed has made it clear that we don’t need a tax cut to stimulate spending. Even without a tax cut, budget deficits are projected for the next decade and beyond. So I ask again: Why a tax cut now? (And maybe here we are getting to the heart of the matter.) Perhaps the Republicans want to increase the deficit. Then in future years they can scream that we must drastically cut the entitlement programs they have always hated.

I have spent my career as an economist promoting the idea that under certain conditions a budget deficit can be a good thing. This is not one of those conditions.

This story was originally published October 31, 2017 at 11:07 AM with the headline "Trump tax cuts will boost the deficit, not the economy."