Tax Cuts Are a Trojan Horse That Will Achieve Higher U.S. National Debt
If you are a traditional Republican, a fiscally responsible Democrat, or just a concerned, responsible American and have an odd feeling about the recent tax cuts, you’d be justified.
And you would be in fine company, along with Dallas Federal Reserve chair Robert Kaplan, Goldman Sachs Group Inc (NYSE:GS), and even the Organisation for Economic Co-operation and Development (OECD). (Source: “Rising tide of debt to hit rich countries’ budgets, warns OECD,” The Financial Times, February 22, 2018.)
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There is a clear and ever more present danger that the U.S. debt will become completely unsustainable. The U.S. national debt is already out of control. It risks going into a full tailspin, risking financial collapse and/or another recession.
The centerpiece of these concerns is the Donald Trump tax cuts. In theory, these could, as the president says, boost productivity. Certainly, the idea that lowering taxes lifts America’s economic potential works.
But it works only in theory. That’s because humans, rather than being ultra-efficient emotion-free machines, are still the ones in charge of businesses and money. Thus, there are no assurances that the tax cuts will help create more jobs and spread more wealth across the board. What the tax cuts will doubtless achieve, however, is push the U.S. national debt far higher than anyone expected.
Tax Cuts Are an Old Experiment
One could describe the Trump tax cuts as an experiment. Unfortunately, it’s an all-too-old experiment that has always shown the opposite results as the hypothesis. Indeed, the United States—and the West in general since the collapse of the Berlin Wall in 1989—has been an observation platform for the “lower taxes for corporations and the rich” mantra for almost three decades. President Ronald Reagan had relaunched this old approach in the mid-1980s, calling it “supply-side economics.”
The Democrats were more accurate in their choice of terminology: “trickle-down economics.”
Only in a make-believe world can higher profits and more wealth at the top reach the bottom tiers of society. The pre-“New Deal” world that led to the 1929 stock market crash functioned on trickle-down economics. It has been the traditional way of the world. In feudal or pre-industrial society, the few rich—usually aristocrats—occasionally passed down their leftover scraps to their serfs. Those serfs were expected to react, showing more loyalty or obedience.
It Wasn’t Tax Cuts That Pulled America Up from Its Darkest Days
In reality, it was the more Keynesian and distributive economics of the New Deal that helped America emerge from the economic depression.
By the 1970s, the idea seemed stale. But turning away from the wealth distribution concept has produced many financial crashes, recessions, and an undeclared depression. Its effects linger even as Trump boasts great gross domestic product (GDP) numbers and the Dow Jones at 25,000. Most Americans don’t see even a shadow of those benefits, only more risk.
If the wealth fails to reach the middle and lower classes in the form of a more stable job market and better services, the tax cuts will have been pointless. In fact, its proponents will have to concede that their only, and dubious, achievement was increasing debt.
Even the positive and initial effects of the tax cuts, such as some companies investing in more production and hiring—while handing out employee bonuses—have no assurance of lasting beyond the next few years. Whatever the stimulus the lower corporate taxes may provide, it could disappear by the time Trump runs for re-election. And Trump may want to consider running again, if all he has to show for his first term is an economy with a record-high debt burden.
The Scale of the Risk Is Staggering
A quick glance at the numbers reveals the scale of the risk. The Trump tax cuts could add as much as $7.0 trillion to the deficit in 10 years. Add to that the higher cost to service that debt, as the Federal Reserve prepares to increase interest rates in 2018—possibly three times. At the current debt level of more than $20.0 trillion, U.S. taxpayers must pay more than $300.0 billion in interest.
The cost of servicing the debt is merely a sideshow to the main story. President Trump seems intent on testing out New Testament miracles and other wonders. Perhaps he’s working with Penn and Teller or the Amazing Kreskin. How else does the president plan to pay for the much-needed infrastructure improvements costing at least $4.0 trillion in 2019 alone?
And if that wasn’t sufficient, the military budget is benefiting from an additional $70.0 billion. This will certainly be spent quickly because the various quagmires in the Middle East and the tensions with North Korea could move up a notch. With all these possibilities of conflict breaking out, it will be hard to contain the ambitions of those in charge at the Pentagon from ordering the world’s biggest army, arsenal, and firepower to solve at least one of these intractable problems.
In short, the budget has clear guidelines. It will benefit the military and build infrastructure. Forget about healthcare.
It’s unclear where, but Trump and Congress will have to move some funds around to make sure the tax cuts don’t start interfering with the regular functions of running a country with the size and ambition of the United States.
Tax Cuts Could Sink America, Not Make It Great
Surely, Trump wants to make America great again. He’s entirely unoriginal in his plan to achieve this though, flaunting military might. Ronald Reagan too spoke a similar language, but he was a far more skilled communicator. Reagan helped persuade committed Democrats to vote for him—twice. Reagan was the diamond tip of a much bigger cultural phenomenon, which was articulated as America confronted its Vietnam demons.
Reagan told people it was OK to be an American. It wasn’t just an economic impulse; Americans needed a certain reassurance. The humiliation of the Iran hostage crisis seemed to highlight the drab 1970s. Jimmy Carter had no chance against Reagan’s infectious optimism. It was so strong as to confuse many otherwise fiscally responsible Republicans into passing unsustainable tax cuts.
No matter, Reagan set a tone before which all successive Democratic presidents (Bill Clinton and Barack Obama) had to adopt. If Trump won, it’s because most Americans could no longer distinguish between the Democrats and Republicans.
The main difference between the two parties was on which side of the identity politics game they played. But they certainly spoke in unison when it came to benefiting corporations and the rich at the expense of the middle classes. Trump beat both big parties because he promised to address the needs of the Americans whom Republicans and Democrats alike had all but forgotten existed.
(By the way, that’s why Trump won; it had nothing to do with Russians or Cossacks interfering.)
Yet Trump has forgotten the very hard lesson he delivered to Hillary Clinton. The tax cuts are only going to boost debt, achieving nothing else.
Trump campaigned on helping Americans rediscover themselves, allowing them more opportunities to feel pride in the small things that matter. These things most certainly include being able to reduce their personal debt burden and provide for a family without losing sleep at night.
The Trump administration presented his tax cuts as serving this very goal, but they do nothing of the sort. They perpetuate, if not aggravate, the growing socioeconomic disparities of the United States. But they do so in a way that should also concern Republican conservatives of the most stringent Protestant work ethic traditions.
Trump’s diversion of more tax dollars toward Homeland Security to, ostensibly, inflict a big blow to illegal immigration, will do nothing more than put on a show.
Trump was right to address the degradation of roads, bridges, and railways in the United States. It’s unacceptable for a medium-sized economy; imagine one as mighty (though resting on weak foundations now) as the United States.
Moody’s Putting America on Notice
Based on basic accounting, taxes should have gone up to pay for the things Trump wants, even forgetting about those he doesn’t want, from healthcare to welfare benefits. Now the U.S. national debt could go into a spiral that will take future generations decades to shed. And the numbers are just the easy part. Eventually, if the tax plan doesn’t generate more revenue through trickle-down mechanisms, the cuts will cause much resentment.
In recent days, there has been much talk of ending meal vouchers, which the federal government has ensured for certain (and a surprisingly high number of) families. Trump wants to terminate them, replacing them with a cheaper but less-healthy alternative. That does nothing to stop the debt.
Moody’s Corporation (NYSE:MCO) has already issued warnings that the U.S. debt will become untenable because of the irresponsibility of the government’s fiscal policy. The best that can happen is a lower credit rating. (Source: “Moody’s: US finances set to ‘deteriorate,’ risking credit rating,” Washington Examiner, February 9, 2018.).
This means it will be gradually more expensive for the U.S. government to borrow, making debt payments even more expensive.
Few Americans realize that if the U.S. has enjoyed a strong credit rating—making it easy to borrow, to print dollars, and to finance armies—it’s because of the spoils of World War II and even the Cold War. Few doubt that the U.S. economy still has much to offer. It’s rich and highly diversified. But it’s at risk from an enemy within. The public debt and deficits could tear the U.S. economy apart.
The best that Americans can hope for is for the traditional Republicans, à la Mitt Romney, Jeb Bush, or Marco Rubio, to pull the plug on Trump. If they don’t, the tax cuts will send the U.S. economy on a downward path from which it will be impossible to get out.
