U.S. Budget Deficit To Hit A Trillion And Tax Cuts Being Blamed

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Commentary

The taxes they pay as a percent of their profits--has been cut in half to an all-time low but hasn’t unleashed more investment, at least not yet.

Also adding to the deficit is a lot more government spending. Last year, lawmakers agreed to big increases in both defense and non-defense outlays that are just now kicking in. The Trump administration was willing to give Democrats more dollars for a range of social programs in exchange for more dollars for defense.

There were a few faint calls for restraint and reforms, particularly to the large entitlement programs Social Security, Medicare and Medicaid. But those calls were quickly drowned out by the bipartisan agreement to spend more. The federal government’s purse is wide open.

The fiscal red ink is a corrosive. It won’t tank the economy next year or even a decade from now, but it will steadily diminish it. Because a big deficit means the government must borrow heavily to pay its bill, all borrowers need to pay higher interest rates than they would otherwise. Businesses find it is more expensive to finance their operations, weighing on their hiring and investment. This may not matter much in any given year, but over the years it means the economy will be meaningfully smaller than it would have been otherwise.

To rein in the nation’s deficits and debt will require both higher taxes and spending restraint. The increased tax burden can only fall on wealthy and high-income taxpayers, simply because that’s where the money is. The spending restraint must fall on the healthcare system, because its outsized growth in caring for the elderly and poor is busting the government’s budget.

The economic threat posed by our fiscal profligacy isn’t too different from the humanitarian threat posed by climate change. Neither will do us in tomorrow or even in the near future. But unless these problems are addressed soon, they will do serious damage. They will ultimately be cataclysmic if we fail to find the political will to respond.

Unfortunately, it doesn’t look like Washington is capable of doing much of anything anytime soon, let alone tackling the daunting challenge of raising taxes and reining in spending. Lawmakers can’t even keep the government open, as they bicker over whether to fund the construction of a wall between the U.S. and Mexico. This is even before the investigations into the President’s potential misdeeds come to a head.

Political gridlock does mean lawmakers won’t be able to pass bad legislation. President Trump said before the election that if Congress remained Republican, he would pass another tax cut. That would have been especially bad policy. Another tax cut would only add to the ballooning deficits. However, doing no harm is not a strategy for getting our fiscal house in order.

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Mark Zandi is chief economist at Moody’s Analytics. Reach him at [email protected]

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