Judd Gregg: Tax reform and the debt

Judd Gregg: Tax reform and the debt
© Keren Carrion

The federal deficit is a growing, real and significant threat to the wellbeing of this nation — especially to the millennials, Generation X-ers and those yet-unlabeled kids who are under 20 or still to be born in the next decade or so.

This problem — the fact that we are running up debt on the federal books at an unprecedented rate — is not going away.

The question is, does the tax bill currently moving through Congress dramatically accelerate the problem?

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Under the form of evaluation known as static scoring, the bill’s likely exacerbating effects on the deficit are exaggerated.

 

On the other hand, the rosy scenario favored by Treasury Secretary Steven MnuchinSteven Terner MnuchinNegotiators remain far apart on coronavirus deal as deadline looms On The Money: White House warns there's likely no deal with no agreement by Friday | More generous unemployment benefits lead to better jobs: study | 167K workers added to private payrolls in July Skepticism grows over Friday deadline for coronavirus deal MORE overestimates the extent to which the bill will spark sufficient growth to mute the deficit.

There are, however, a few facts that are clear.

Liberals tell us the bill will deepen the deficit.  

They may be right, but they hardly come to this debate with clean hands. 

During President Obama’s tenure — especially in the years when both the House and Senate were also under Democratic control — the debt exploded.  

The debt more than doubled in Obama’s eight years, to almost $20 trillion. It crossed the rubicon of being more than 60 percent of our GDP — generally accepted as the stepping-off point for a nation headed toward insolvency.  

More importantly, this massive use of the credit of the next generation of Americans was done almost entirely on the spending side of the government, through adding to entitlement programs.

These entitlements tend by their very nature to run on autopilot, driving the debt inexorably higher.

By the time Obama departed, the debt-to-GDP ratio was above 70 percent.

The idea that liberals have been converted to caring deeply about our deficit and debt needs to be taken with many grains of salt. 

They are not concerned. They are simply political opportunists. 

What is the real effect of the likely tax bill on the debt?

It is admitted that, on a static-scoring basis, the bill will add $1.5 trillion to the debt over ten years. 

Prior tax reform efforts like Reagan-Rostenkowski and Simpson-Bowles had no deficit impact, as they were scored on a static basis as being revenue neutral. 

But getting to revenue neutrality, which is the correct and truly conservative way to do tax reform, requires numerous tough decisions on eliminating or reducing popular deductions and exemptions. 

It is fairly clear that making tough decisions is not part of the make-up of this administration or Congress. 

This fact has been disappointingly displayed by their abandonment of any real effort to correct the systemic drivers of our debt, Medicare and Social Security.

In addition, advocates for the bill have not owned up to the gimmicks that have been inserted in order to try to pass it with just 51 votes in the Senate, under the process known as reconciliation.

These gimmicks involve the premature ending of numerous tax benefits. More honestly scored, they add about $500 billion to the $1.5 trillion of debt already acknowledged — plus interest.   

Using static scoring, the actual debt added to the backs of the American taxpayer by the bill is approximately $2.2 trillion over 10 years.

But there are those, especially the always-optimistic Mnuchin, who assert that static scoring misrepresents the likely effects of the bill.

They are partly right.

Common sense may not be in vogue in Washington but it should be easy to understand that it you pass a tax bill that stimulates economic growth, higher tax revenues should result.

The problem is that it is also obvious, to even the least observant, that whenever part of the structure of such a tax reform is a significant tax cut, the lost revenue from the cut has never been made up by the new revenues from economic growth.

It is therefore reasonable to conclude that this likely tax bill will add to the deficit.  

Over the next ten years, the deficit will increase by approximately $1 trillion if the likely tax bill is passed.  

This number is halfway between the static score with gimmicks and the non-score from Mnuchin.

It is a guess — as are all deficit estimates ten years out — but a good one.

The total cost of the federal government over the next ten years will exceed $50 trillion. The deficits over that period, independent of this likely tax bill, could be as high as 20 percent of that cost — $10 trillion.

Spending, not lack of revenues, drives these deficits and this debt. This spending is primarily a function of the cost of the entitlements that support healthcare, especially for the baby boomers as they age. 

This is the essence of the fiscal trauma we are headed toward.

Adding another $1 trillion of debt on top of this will not disproportionally skew the debt picture. It will not help it either.

If you are a conservative, there is only one somewhat plausible argument to be made for this bill.

It is that it is better to have the debt increase by allowing people to spend their own money than by adding programs to the federal ledger that generate automatic entitlement spending.  

The bang for the deficit buck is much great when it generates economic activity than when it merely subsidizes a favored class of citizens.

This is the case that Republicans can make, if they must make one, for why they are passing this likely tax bill.

But there is no mistaking that it will aggravate an already rather aggravating debt situation.

Judd Gregg (R) is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee, and as ranking member of the Senate Appropriations Foreign Operations subcommittee.