Taxes

Next Task for GOP: Spend Less and Help the Poor

Republicans did well to cut corporate taxes, not so well at expanding opportunity.

Lots left to do.

Photographer: Chris Kleponis - Pool/Getty Images

“America died tonight,” a commentator wrote on Twitter following Senate passage of the Republican tax bill earlier this month. “This is Armageddon,” House Minority Leader Nancy Pelosi claimed days later.

Let’s call these overreactions. History hasn’t stopped, and won’t when President Donald Trump signs the tax overhaul, probably later this week. So why not look forward and ask, where do tax and budget policy go from here?

QuickTake Guide to the GOP Tax Plan

First, let’s take a step back and consider the government’s finances over the next several decades. The national debt is projected to more than double over the next 30 years, rising from 77 percent of annual economic output in 2017 to 150 percent in 2047. This is driven in large part by spending on Medicare, which is projected to double over those three decades, rising from 3.1 percent of annual gross domestic product in 2017 to 6.1 percent in 2047. Spending on Social Security is projected to increase by 1.4 percentage points to 6.3 percent of GDP in 2047. Interest payments on the debt will grow significantly, from 1.4 percent of GDP today to a whopping 6.2 percent three decades from now.

The bottom line: National debt becomes a more serious problem for the U.S. with each passing year, and is primarily driven by spending on middle-class entitlement programs and interest payments on the debt itself. By adding over $1 trillion in new debt to the $11 trillion already projected to be added over the coming decade, the Republican tax law (whatever its merits, some of which are quite strong) makes this problem worse.

To address it, tax and budget policy will need to move toward spending less money through the tax code in a way that increases economic efficiency and reduces government-caused distortions in the economy. For example, it is lamentable that the tax deduction for mortgage-interest payments enjoyed by high-earning households will survive the tax-overhaul process largely intact. There are many other similarly imprudent provisions that will remain in the tax code as well, especially the tax-free status of employer-provided health insurance.

The GOP found it too difficult politically to remove some of these provisions, illustrating the pitfalls of using the tax code for social policy. If Congress had to appropriate funds every year for a subsidy given to high-earning households who own expensive, debt-financed homes — well, that would never happen. But when the same policy (from an economic standpoint) is part of the permanent tax code, it remains less scrutinized by voters. And when you try to take it away, you are accused of raising people’s taxes. But properly considered, you aren’t raising taxes — you’re eliminating a subsidy. You are cutting spending.

To their credit, Republicans took the economically prudent step of curtailing the federal deduction for state and local tax payments, and significantly increasing the share of households who will take the standard deduction rather than itemizing. In the future, the tax base should be broadened even further, and politicians and public figures can help by discussing spending through the tax code as what it is.

Senator Marco Rubio argued recently that the growing national debt requires reshaping Social Security and Medicare. Many progressives didn’t like hearing this, especially when Republicans are in the process of adding to the debt. But the senator is correct, and a major challenge for tax and budget policy going forward will be cutting middle-class entitlement spending while preserving and strengthening safety-net programs for the poor.

What will make conservatives less comfortable is that those same budget projections suggest the need for increases in federal revenue, as well. Take Medicare. To keep Medicare spending from exceeding its current level would eventually require cutting projected Medicare spending in half. It is politically unlikely that this will occur. So while the debt should be primarily addressed by spending cuts to Medicare and Social Security, some new revenue will probably be needed.

How to generate that new revenue? I wouldn’t increase individual income or corporate tax rates. So perhaps a carbon tax, coupled with eliminating inefficient environmental regulations? Perhaps a federal consumption tax? This debate needs to be had, and conservatives should be ready to come to the table.

Speaking of coming to the table, one-party passage of an overhaul of the nation’s entire tax system has demonstrated (once again — see Act, Affordable Care) that major public policy changes should be done with at least some bipartisan support. For one thing, bipartisanship limits shenanigans. The GOP’s plan to tax dozens of universities in part because it doesn’t like their politics is absurd. Repealing the Affordable Care Act’s individual mandate without broader changes to health policy is unwise as well.

Bipartisan laws are also more stable. Some Democrats will probably run successfully on a platform of higher taxes for business investment in the next few election cycles, undermining the policy certainty that contributes to economic growth.

I’ll close by congratulating Republicans on pushing through needed changes to the corporate tax code, which will increase wages and make the U.S. more competitive globally. And I’ll criticize the GOP’s failure to include more meaningful measures to help the working poor. Earnings subsidies for low-income households are a good feature of the tax code, increasing employment and reducing poverty. They will survive, but they should have been expanded. Republicans, whose rhetoric champions upward mobility, should be the first to expand economic opportunity for the poor and vulnerable. Maybe next time.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Michael R. Strain at mstrain4@bloomberg.net

    To contact the editor responsible for this story:
    Jonathan Landman at jlandman4@bloomberg.net

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