As a vote on tax reform nears in the Senate, it’s encouraging to finally hear serious discussion about the impact of tax cuts on the national debt. Deficit hawks entered the fray with proposals to safeguard against the risk of making it harder in coming years for the government to balance its books, which needs to be taken into account as the Senate deliberates.
Support for the tax reform package currently on the table is generally predicated on the promise it will stimulate economic growth to levels sufficient to cover loss of revenue from lower taxes. That is far from a certainty, and it makes sense for Congress to hedge its bets on how much reform may fuel new growth in an already healthy economy.
As a Senate panel voted to pass a reform bill to the floor, another committee heard testimony from the Trump administration’s nominee to serve as chairman of the Federal Reserve Bank, who explicitly questioned whether much more economic growth is possible, with or without tax reform. Jerome Powell told the Senate Banking Committee he doubts the economy can grow more than 2 or 2.5 percent next year, noting that as we come closer to full employment, growth will slow. His viewpoint is in contrast to the Republican avowal that lower taxes for consumers and businesses will supercharge the economy to growth beyond 2 percent. But Powell’s assessment gives validity to projections by the Congressional Budget Office that suggest reform measures, as they have been disclosed so far, could increase the federal deficit by more than $1.4 trillion over 10 years.
While there is much at stake politically over whether tax reform can pass Congress this year, there is even more at stake for future generations should the measure end up making the national debt — now exceeding $200 trillion — even more intractable. Backers of reform measures argue reducing corporate tax levels will encourage companies to expand operations and hire more workers. Yet, we are now at levels approaching what economists regard as full employment, potentially mitigating the persuasiveness of the trickle-down theory of economic stimulus.
Sen. Bob Corker, R-Tenn., a self-described deficit hawk, said he would like to see some kind of mechanism inserted into the reform measures that would allow for tax rates to increase after a period of time if the reform package fails to produce the promised levels of stimulus. That is a reasonable proposal worthy of consideration as Congress wrangles over the final details. Utah’s two senators have also historically spoken of their concerns over growing debt levels, and Sens. Orrin Hatch and Mike Lee owe it to their constituents to weigh in on the metrics of a tax reform measure as they apply to keeping government on the plus side of the balance sheet.
Any effort as intricate and complicated as tax reform will produce impacts unforeseen at the time of passage. Just who will benefit, and how much, may not be clear until some time after the next one or two tax-filing periods. It’s certainly possible for a future Congress to make adjustments if things don’t work out as planned, but we are now saddled with levels of debt that can serve as a drag on the economy and may in the future become a national security risk. Addressing that reality is worthy of prioritization at least equal to the urgency of altering the nation’s tax code.