The New Tax Bill Is Likely to Take Us over a Fiscal Cliff

 

The Republican tax bill has now come out of conference and will soon be voted on by both the House and the Senate. It is expected to easily pass both chambers and be signed by the President. As I have discussed extensively on this blog, I have no argument with the individual features of this bill.  They will definitely increase economic growth which is highly desirable.
The problem is that the tax bill will also add $1 trillion to the debt over ten years (as scored by the JCT).  It is simply outrageous for the GOP to consciously add $1 trillion to our already $15 trillion debt (the public part on which we pay interest), which at 77% and climbing, is the highest it has been since right after WWII.


But the damage will be even worse than this.  The trillion dollar artificial stimulus is likely to overheat an already briskly growing economy.  As the Economist reports in its latest issue:

  • Second quarter growth of 3.1% and third quarter growth of 3.3% are very strong.
  • Median household income grew 5.2% in 2015 and 3.2% in 2016.
  • The average net worth of households in the middle income quintile grew by 34% between 2013 and 2015.
  • The wages and salaries of production workers grew at a 3.8% pace in the third quarter of 2017.
  • The unemployment rate at the end of 2018 is likely to be between 3.4% and 3.8%.

Economic growth is good because it raises living standards across the board. But faster growth also means higher inflation which means higher interest rates as the Federal Reserve responds.  Higher interest rates mean higher interest payments on our massive debt. Every time the Federal Reserve raises interest rates by ¼ %, the interest payments on our debt will increase by about $38 billion per year.  A 2% increase in interest rates, likely within two years, means a $300 billion increase in annual interest (on top of the $266 billion paid in FY 2017).  Our massive debt will soon become a huge burden for the federal budget.

Conclusion. Adding $1 trillion to the debt on top of the existing debt is a terrible idea. Such artificial stimulus at a time when GDP growth is already picking up will drive up interest rates all the faster and greatly speed up the day of reckoning for extreme fiscal irresponsibility.

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7 thoughts on “The New Tax Bill Is Likely to Take Us over a Fiscal Cliff

  1. $1 Trillion extra Federal deficit over 10 years from tax reform is really over shadowed by the annually accrued excess level of health spending. The National level of annual excess health spending will represent an expense to the Federal government annually of $400 Billion or $4 Trillion over the next 10 years.

    Our nation’s excess health spending annually can be accurately assessed by a comparison of our nation’s annual health spending as a portion of our GDP as compared to the other 34 nation’s of the OECD. Last year, our nation’s health spending represented 18.2% of our national economy. The health spending by the other 34 OECD nations cluster around 12% of their GDP. A few of the OECD nations are substantially less than 12%, and only 1 was at 13.1%. For our economy in 2016, the difference between 18% and 13% represented $1 Trillion that year alone. The portion of the $1 Trillion excess health spending contributed by the Federal government represented $400 Billion.

    Our national preoccupation with equitable and just taxation should always be judged by trust, cooperation and reciprocity. The uproar currently occurring is negligent by all involved: our nation’s deficient awareness of HEALTHCARE as the most prominent source of our nation’s level of deficit spending. One more time, our nation is headed to bankruptcy on the back of our inefficient and variably effective healthcare industry. The future contribution to the Federal deficit by the new Taxation Legislation is over-shadowed, 4:1, by the Grimm Reaper of health spending.

    This national tragedy has many contributing issues but is primarily driven by Parkinson’s Law for the governance of large institutions. It is known most widely as “Work expands to use the resources available.” The most prominent contributing issue is the pervasive loss of Social Capital over the last 50 years within many neighborhoods of each community. I live in a community where it has a Zip Code whose citizens experience the worst level of African American death rate for men by homicide. The associated “social dilemma” is profound for each of my community’s citizens.

    Here is the final reminder. The financial ROI for Social Capital investments is 3:1, rising to 7:1 for early childhood education. Our nation’s focus on the Common Good should be community driven. The Cooperative Extension Service for agriculture should be our model, instituted county by county by Congress in “”” 1914 “”” by its Smith-Lever Act. A supremely focused “shoot the moon” effort will be required and limited to a fixed, annual Federal Expense of $1.00 per citizen.

    see https://nationalhealthusa.net/home/rationale/

    GDP means gross domestic product
    OECD means Organization for Economic Cooperation and Development
    ROI means return on investment

    • Thanks for your astute analysis of our debt problem, especially pointing out that excess healthcare spending by the federal government is four times as bad as the $1 trillion dollar loss from the new tax law.
      I will respond to this soon, perhaps tomorrow.

    • Why limit your comparison to health care? Using the same methodology, I would bet we have a significant excess military spending,too.

      • Yes, there is waste in the military such as 170 overseas bases! But the military budget at 3.5% of GDP is only 1/5 the size of healthcare at 18% of GDP. We have to focus on where the problem is the greatest.

      • Among the OECD nation’s of the world, our military is still the most effective. Our nation’s healthcare is probably the least effective. Also, our nation’s agriculture industry is the most productive in the world. The most egregious example, for viewing our nation’s healthcare, is its maternal healthcare. Our nation’s maternal mortality would need to be reduced by 70% to rank among the 10 best OECD nations. Out of the nearly 1,000 annual maternal deaths occurring for our citizens, more than 500 occurred primarily because they lived in the wrong nation at the start of their pregnancy.

  2. I concur that adding $1T to National Debt is not a positive thing. You make the same arguments as Nancy Pelosi, Chuck Schumer, et. al.; sudden and recent converts to the ranks of those alarmed by the size of the National Debt. Certainly, we who have expressed these concerns for years would like to welcome these converts with open arms.

    Far be it from me to question the authenticity of this group’s new-found conviction regarding the significant balance of the National Debt, but examining the fiscal history of politicians on both sides of the isle indicates that this sudden dose of religion is questionable.

    Since 1977 the annual US Tax Revenues have increased from $356B to and estimated $3.56T in 2017 a $3.2T increase, an average annual increase of $80.1B. Plenty of Tax revenue to pay down the US National Debt.
    The problem is that US Spending has outpaced revenues; going from $409B in 1977 to an estimated $4.06T in 2017; a $3.65T increase, an average annual increase of $91.3B. (Data from the Office of Management and Budget: https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/hist01z1.xls)

    Thus, the evidence seems to indicate that the history of our political leaders would cause one to conclude that keeping taxes high will NOT ensure maintaining nor reduction of the National Debt. Concerns about maintaining tax revenues as a means to ensure fiscal responsibility toward the prudent and orderly discharge of the National Debt is folly if providing these revenues simply means our financial trustees will use it to fund more unsupportable levels of Government spending.

    The issue facing the size and dispensation of the National Debt is not current tax rates. Will reduced taxes increase economic growth? Perhaps. More likely this will serve primarily as a full employment act for economists to debate.

    Instead the issue is that we have no mechanism that forces our political leaders to act fiscally responsible. We have no mechanism requiring a balanced budget nor a plan for systematically reducing the current debt balance. Prudent deficits may well be necessary, but as is the case with any debt financing, a prudent plan should be required to ensure tha debt can be discharged in an orderly fashion.

    Thank you for championing the issue of reducing the National Debt. More support is always needed. But failing to reduce or limit the fiscal cocaine going to our political spending addicts won’t reduce the debt.

    • I agree that a Balanced Budget Amendment (or even a Term Limits Amendment) would solve the problem but such amendments are unlikely to be implemented anytime soon. In the meantime the problem gets worse every year as you point out.
      It’s not just the Republican’s fault, of course, but they are the latest perpetrators. But regardless of whose fault it is (both party’s), we need a SOLUTION!
      More tomorrow.

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