Do big budget deficits matter anymore?
That’s a big question lurking beneath the surface as President Trump’s new tax-cut proposals are rolling into public view.
Mr. Trump’s election campaign included both pitches for tax cuts and pledges to tame federal debt. As he has settled into the White House, however, the talk has increasingly shifted toward tax cuts and away from tax reform that holds revenues steady (as would be needed to make tax changes permanent by a majority vote in Congress).
It’s not yet a detailed plan, but Treasury Secretary Steven Mnuchin set goals and principles Wednesday that include slashing corporate tax rates from 35 percent of profits to 15 percent, and cutting individual taxes as well.
This isn’t just a pivot for the Trump team. Many fiscal-policy experts say it rests within a larger pattern: Politicians, and to some extent the economists who advise them, aren’t as focused as they used to be on restraining government debt and deficits.
That doesn’t mean Secretary Mnuchin paid no lip service to the goal of fiscal discipline, or that Congress will ignore that value in its deliberations. But at a time when polls suggest the public still sees deficits as an important problem, lawmakers face a test of whether they’ll put the goal of short-term fiscal stimulus ahead of long-term fiscal discipline.
“The economy is doing reasonably well,” says Roberton Williams, an expert at the nonpartisan Tax Policy Center in Washington. America got a boost from spending “like crazy when the economy was bad,” he says, but in recent times “we've never quite figured out that second step” of getting back on a balanced track during good times.
“We don’t fill back up that rainy day fund,” he says, drawing a metaphor from reserves that many states have created as cushions against recession. “States are much better at that.”
It may be a false sense of security. Although federal deficits surged during and after the Great Recession of 2007 to 2009, they have actually fallen sharply since then and are now near their five-decade average as a share of the US economy.
But even without tax cuts, that annual gap between revenue and spending appears poised to rise again – and to drive a parallel surge in public debt from this decade into the future, as obligations for both health-care entitlements and interest on the debt soar.
A key shift
It’s not that politicians aren’t aware of the problem. And some are actively seeking to address it.
But fiscal discipline isn’t viewed as an imperative the way it once more generally was.
Bill White, a former Houston mayor who researched and wrote a book on America’s fiscal history, says a key shift happened in the early 2000s under George W. Bush. President Bush pushed for big tax cuts in 2003 even though the nation was at war, the economy wasn’t in recession, and nonpartisan forecasts showed widening deficits as a result.
Republican strategists had taken note: Bush’s father had been voted out of the White House in 1992 after raising taxes despite a “no new taxes” pledge.
And Mr. White says Democrats have shared the blame of Washington’s shifting fiscal mores. One bipartisan move under Bush was the funding of a new entitlement – prescription-drug benefits under Medicare – without paying for it.
It’s not just politics behind the shift, either. In the wake of the Great Recession, liberal economists have argued the case that fiscal stimulus (jargon for federal spending or tax cuts that can give a short-term boost to the economy) may be justifiable in some nonrecession times. (But for the record: Those economists generally are skeptical that Trump’s tax cuts would raise growth meaningfully.)
A streak of prudence
All this is different from the past, says White.
“The fiscal tradition [of America] recognized the link between decisions on spending and decisions on taxes,” he says.
Conservatives believed that having a visible price tag (taxes) would help put a check on public spending, while progressives saw the need for sustainable funding for a social safety net.
And if Americans aren’t fans of tax hikes, some polls suggest the public has a streak of fiscal prudence that has held pretty steady.
Looking at government, they’ve strongly supported the idea of balanced budgets in polls spanning from 1940 to the early 2000s, according to the Roper Center for Public Opinion Research. And in their personal lives, Americans increasingly see saving money as preferable to spending (at least as an ideal), Gallup surveys find.
Although economists often aren’t fans of strict budgetary balance, they agree on the dangers that too much debt can bring – potentially higher interest rates or a financial panic over default risks.
At the same time, many economists and ordinary Americans say the time is ripe for simplifying the tax system and seeking to make it promote greater economic growth and fairness.
Trump's tax cuts
Those goals took center stage as Mnuchin and Gary Cohn, director of the National Economic Council, announced Trump’s proposals Wednesday.
“Making the economy work better for all the American people” is the president’s goal, Mr. Cohn said at a White House briefing.
The proposal includes paring the number of individual tax brackets to just three, giving businesses a “massive” tax cut, and eliminating the estate tax.
Voters rarely complain about a cut in their taxes. In April Gallup polling, 51 percent of respondents called their taxes “too high.” Yet people aren’t necessarily crying out for tax cuts: Some 61 percent in the same poll call what they owe “fair.” And two-thirds say businesses pay too little in taxes, not too much.
US stock prices were trading at or near record highs Wednesday afternoon as details of the Trump proposal for business taxes were coming into focus.
Regarding impacts on the budget deficit, Mnuchin said, “we are working with the House and Senate on all the details” to get the legislation passed. In recent days he has also suggested that economic growth would allow a tax cut to pay for itself – a notion disputed by economists.
Republicans in Congress range from some focused on reining in deficits (notably House Speaker Paul Ryan) to others more open to tax cuts that aren’t paid for with reductions in spending.
The legislative outlook is uncertain, but longer term White says he's hopeful that forces of fiscal restraint – which he thinks have served the nation well in the past – can revive.
“I think there could be a backlash among small-government conservatives to the Trump programs," he says. "And I think that many people who are Democrats understand that rising interest costs ... are crowding out the possibility for investing more" in things like education and infrastructure.