Robert E. Rubin, a co-chairman emeritus of the Council on Foreign Relations, was U.S. treasury secretary from 1995 to 1999.
Proponents of the Republican tax bill claim it will pay for itself with increased growth. But what if that growth doesn’t materialize? To mollify colleagues concerned about the bill’s deficit impact, Senate GOP leaders are planning to add a new provision: a “trigger” to raise corporate taxes if revenue doesn’t meet a specified target.
This notion is both unworkable and misguided. No serious deficit-minded lawmaker should support it.
Fast-forward a few years. Anyone who has watched Washington in action knows how unlikely it is that the president and Congress will allow the threatened corporate tax increases to take effect. Even if that were to happen, under the reported plan the triggered cuts would offset only a small share of the lost revenue. Meanwhile, if the trigger were to be pulled during an economic downturn, the effect could be to further slow the economy and make deficits even worse.
According to congressional scorekeepers, the Senate tax bill would cost an estimated $1.4 trillion over 10 years. That’s on paper. In real life, the cost would likely be much higher. The bill includes a number of tax cuts for individuals that are slated to expire after 2025, but future policymakers will very likely extend them, making the long-term deficit impact worse than the stated figure.
Using highly questionable supply-side arguments, which history has shown to be wrong, the bill’s advocates argue that it will spur so much economic growth, with so many businesses and individuals paying so much more in taxes on their higher earnings, that the measure will largely or entirely pay for itself.
Nevertheless, to assuage deficit-minded senators who aren’t satisfied by this argument, the trigger would activate $350 billion in corporate tax increases if that projection falls short. If the bill were to lose $1.4 trillion, as the Joint Committee on Taxation estimates, the $350 billion would add back only a quarter on each dollar of those lost revenues.
But just as the policymakers of tomorrow are unlikely to let the personal tax cuts expire after 2025, history suggests that they likely won’t let corporate tax increases take effect once triggered.
To comply with Congress’s complicated budget rules, President George W. Bush and Congress crafted the 2001 tax cuts so that they would expire after 10 years. When the time came, however, policymakers eventually made more than 80 percent of them permanent. And they did so even though deficits were high and debt was rising.
Similarly, the federal “pay-as-you-go” law requires that tax cuts and entitlement increases be paid for in the year they’re enacted; it that doesn’t happen, automatic cuts in Medicare and other important programs are supposed to be triggered automatically. But GOP leaders are now publicly stating that once their tax bill is approved, they will follow quickly with legislation to exempt the just-passed tax cuts from this trigger. Why would anybody think they won’t end up doing the same with the trigger, if the need arises?
But let’s presume for a moment that lawmakers would let the $350 billion in corporate tax increases take effect. That could cause more harm than good.
Let’s say that the economy is weak in the year the tax increases are triggered. That would be a bad time to raise taxes; by taking money out of the economy, a tax increase then could push a weakened economy into recession. And a struggling economy weakened by a tax increase could mean even lower federal tax receipts from businesses and individuals, undercutting the purpose of the corporate tax increase to begin with.
Deficit-minded senators are right to be concerned about our fiscal future. Even under current tax and spending policies — much less a big tax cut that would make matters substantially worse — the nation’s outstanding debt is expected to rise significantly as a share of the economy in the coming years and decades. If left unaddressed, that would weaken the economy over time, eroding the living standards of our children and grandchildren.
At some point, we’re going to have to address the nation’s rising debt. For now, at least, Congress should not make things worse.
As for the trigger, no one should be fooled. Rather than mitigating the impact of future revenue losses, it will likely prove a toothless tiger whose main function was to provide cover for deficit-increasing tax cuts. The policymakers of tomorrow almost certainly will let it fall by the wayside. The time to prevent the president and Congress from enacting misguided tax cuts that swell the debt is now.
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