One of the most persistent arguments against the tax-reform proposals making their way through Congress is that they will increase the national debt. But it’s a misdirected one.
Deficit hawks are right to be concerned about the seemingly never-ending additions to the debt. But Congress hasn’t accumulated $20 trillion of debt because people aren’t taxed enough. We’re in debt because Congress has a spending addiction.
Revenue is certainly not the problem. Even under the current tax-reform proposals, the size of the proposed cuts are miniscule compared to the coming spending increases.
The approaching end-of-the-year spending deal could raise the debt by hundreds of billions between this year and next. Deficit hawks should focus on spending reforms. After all, it is spending that drives the need for taxes.
When scoring the tax-reform proposals, Congress rightly allowed them to decrease revenues over 10 years by $1.5 trillion — about 3.5 percent of projected revenue. But such “static” budget scores provide zero useful information about how the reform will actually affect the deficit.
Properly designed tax reform will lead to a larger economy and higher wages. Each of these economic benefits can result in more tax revenue.
A recent Heritage Foundation analysis shows that the Senate tax reform bill could boost the size of the U.S. economy by 2.8 percent over the long run.
Other estimates are even more optimistic. Nine leading economists recently described how the economy could see a boost of up to 4 percent due to tax reform. The President’s Council of Economic advisors believe the economy could grow between 3 and 5 percent, a range that was independently verified by three economists from Boston University.
So how much revenue will result from economic growth?
Tax reform could result in more than $130 billion of new revenue in every year outside the current budget window. And that’s using the most conservative of the estimates above. More optimistic estimates would bring in well north of $200 billion.
Economic growth will not materialize overnight, but even within the first 10 years, independent analysis from the Tax Foundation shows that tax reform would make back about $1 trillion of supposedly lost $1.5 trillion of static revenue.
Thus, the government reported 10-year static revenue reduction will actually be closer to 1 percent, not the 3.5 percent projected on a static basis.
Even more importantly, once the economy reaches its new larger potential, most — if not all — of the tax cuts will be covered by increased revenue from a larger economy.
Holding pro-growth tax reform hostage over the near-term deficit impact unwittingly makes the necessary spending reforms harder in the future.
Some have suggested that tax reform should include automatic tax increases that would be triggered by larger deficits or slow economic growth.
But the deficit cannot be eliminated with tax increases. Believing we can denies the fundamental problem: The deficit is driven by uncontrolled spending.
Tax reform that grows the economy can also ease the burden of paying down the debt. Robust economic growth is a necessary component of managing our deficit. Pro-growth tax reform that allows for a larger and more robust economy means our debt relative to our output shrinks and makes the necessary spending reforms easier.
Following tax reform, Congress has an important opportunity to properly address the deficit and ongoing overspending. The fiscal year 2018 funding deadline is the appropriate place to right-size federal spending.
Investment and economic growth are not instantaneous phenomenon. But over time, properly designed tax reform can provide additional jobs and higher wages for working Americans while setting the stage for the necessary spending reforms in the months to come.
Adam Michel is an analyst specializing in tax and budget issues at The Heritage Foundation’sRoe Institute for Economic Policy Studies (heritage.org). Information about Heritage’s funding may be found at http://www.heritage.org/about/reports.cfm
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