Is President Trump blowing up the deficit and dooming the economy? Trump’s big tax cuts and spending increases have substantially widened the deficit – the annual gap between government income and expenses – to nearly $1 trillion, lending fresh urgency to a debate that seemed to have vanished from the halls of Congress in recent years. Some economists and think tanks say the red ink could ultimately crimp the economy by pushing up borrowing costs for Americans and hampering the government’s ability to spend in a crisis. That could mar Trump’s economic legacy, much as a big debt run-up in the 1980s tainted President Reagan’s. Meanwhile, the sum of all annual deficits and surpluses, the national debt, is an eye-popping $21 trillion. The ratio of national debt held by the public – which excludes things like Social Security – to gross domestic product is at 78 percent, the highest level in 70 years, according to the Committee for a Responsible Federal Budget, a nonpartisan, nonprofit group.
The 35-day partial government shutdown, resolved at least temporarily on Jan. 25, raised questions about whether a divided Congress can pass a new spending deal this year that begins to tackle the budget gap. In early January, Fitch Ratings warned that a failure to grapple with the deficit could eventually prompt it to lower the nation’s credit rating, a move that would roil markets and the economy. “Given that the president and Congress can’t agree on simply keeping the government open, there is little prospect they can agree on addressing the nation’s fiscal problems,” says Mark Zandi, chief economist of Moody’s Analytics. Also placing renewed focus on the deficit: The economic lift fueled by the Republican tax and spending measures is expected to fade this year. That’s sparking questions about whether the lingering hangover – higher deficits – will ultimately slow or derail an economy already set to cool.
Other analysts downplay any tangible economic impact from the deficit. They note interest rates remain low and bondholders seem to have a limitless appetite for financing U.S. borrowing, especially when other countries are far less financially stable. “Even with a big deficit, the U.S. is still a pretty good bet” for bondholders, says economist Paul Ashworth of Capital Economics. “I’m not sure why … people will start to panic in another month or two or in a year.” The budget deficit is expected to reach $900 billion in fiscal 2019 and hover at about $1 trillion or above for the next decade, up from $779 billion last year, according to Congressional Budget Office projections. At least 40 percent of the increase can be traced to the tax and spending measures. Trump vowed that the sweeping tax cut would pay for itself by generating more economic growth that swells government coffers.
But that hasn’t happened. The tax cut, passed in late 2017, is expected to cost the government $1.84 trillion over the next decade, according to the Committee for a Responsible Federal Budget and the CBO. While faster economic growth is forecast to generate about $570 billion in additional revenue, that will be offset by higher interest payments on a bigger national debt, the committee says. “Deficit projections over the next decade are unrivaled by any time in our nation’s history save for World War II and the immediate aftermath of the Great Recession,” House Budget Committee Chairman John Yarmuth, D-Ky., said at a hearing recently. All told, the tax and spending laws are poised to add $2.1 trillion to $4.7 trillion to the debt over 10 years, depending on whether they’re extended beyond their current terms. And so the U.S. debt held by the public as a share of gross domestic product is expected to rise from 78 percent to 93 to 105 percent over the next decade. Without the legislation, debt to GDP would have climbed to 89 percent over that period, the committee for a responsible budget says. To be sure, other expenses such as Social Security, Medicare and interest on the debt are also big drivers of the deficit. “The (tax and spending) legislation just made things worse,” says Michael Peterson, CEO of the Peter G. Peterson Foundation, which addresses U.S. fiscal challenges.
Even as the Republican Party pushed the Tax Cuts and Jobs Act through Congress in December 2017, critics were pointing out that it was filled with tricks and gimmicks meant to obscure the fact that it was a massive giveaway to corporations and the wealthy. Now that the act has been law for more than and a year, the extent of its deception is coming into focus. Writing for Vox, Matt Yglesias explained that the online furor from many supporters of President Donald Trump now filing their taxes appears to be a direct result of some accounting chicanery from the IRS designed to make the law more popular. While the law did generally lower tax rates for most Americans — and then set them to spike after the 10-year mark — it didn’t lower most workers’ obligation by all that much. So instead of leveling with the American people and explaining that the purpose of the tax bill was never to provided much relief for typical people, the administration appears to have tried to tweak the IRS’s withholding guidelines to make it look like taxpayers got a bigger cut than they actually did. They could do this because the IRS collects taxes throughout the year from most workers through their employers. For most people, it collects more money than taxpayers will ultimately owe — which is why so many Americans get refunds from the IRS during tax season, rather than having to pay the government money. In what seems to be an attempt to bolster the tax law in the eyes of voters, the IRS reduced the amount of taxes withheld from workers’ weekly paychecks throughout 2018, with an unfortunate result. Now that people are paying their taxes, they’re getting smaller refunds than they expected or owing the government more money than they had anticipated. “If this was intended to give Republicans a boost in the midterms it obviously didn’t work, in part because the once-a-year tax filing process is a lot more salient than the biweekly process of automatic withholding,” wrote Yglesias. “In fact, they are now facing a backlash from an angry public that includes millions of people who were expecting tax refunds that they are now not going to get.”
And Brad Setser, a former deputy assistant secretary in the Treasury Department, explained in the New York Times Wednesday that while American workers are getting less than they had hoped for from tax reform, corporations are running away with even more than they were promised. He pointed out that the tax bill’s corporate rate cuts were promoted as a tool to reduce the incentive for companies to move operations offshore. In fact, it has done the opposite, he argued. “Overall, the Tax Cuts and Jobs Act amounted to a technocratic sleight of hand — a scheme set to shift an even greater share of the federal tax burden onto the shoulders of American families.” It’s not clear how much Trump knew about this — despite his claims to the contrary, he seems to have a thin grasp on tax policy. But, Setser argued, his advisers and those working on Capitol Hill must have known what the result of the plan would be. They left open gaping loopholes that allow corporations to get away with exactly the kind of behavior Trump pledged to end. On top of the deception about the effect on personal tax rates, this trickery will also leave many Americans let down by the administration. Trump promised to bring a flood of business investment from overseas, but it’s not happening. The overhyped Foxconn factory plan in Wisconsin is turning out to be a bust. The president promised the end to all the corporate practices Americans hate, but if anything, these behaviors have accelerated. While some will believe Trump when he says the sky is green, eventually, economic reality catches up with the voting public.