CBO Report Misleads but Still Underscores Debt Crisis
Deficits will return to $1 trillion or more, and the CBO primarily blames tax cuts.
With the newest Congressional Budget Office report laying out the impact on the deficit of Republican tax reform and the omnibus spending bill, the national debt is once again a national discussion. Yet it can be an infuriating discussion because the topic is riddled with technocratic minutiae, political doublespeak and fiscal sleight of hand.
The CBO predicts the combination of tax cuts and new spending will drive deficits back above the $1 trillion threshold annually for the foreseeable future, and the national debt to 100% of GDP by 2028. The CBO claims tax cuts will “cost” the government $1.3 trillion in revenue.
There are several problems with these claims. First, the CBO is a horrible predictor of economic outcomes; it’s often inaccurate by orders of magnitude. For example, before ObamaCare was passed, the CBO predicted ObamaCare’s cost at $938 billion over the following decade. Just two years later, the CBO had “revised” that number to $1.76 trillion, doubling the projected cost. Likewise, the CBO drastically overestimated the number of Americans who would enroll in ObamaCare (24 million projected, nine million actual). Historically, the CBO has significantly overestimated potential revenues from tax increases and significantly underestimated economic growth (and thus tax receipts) from tax cuts.
But perhaps the biggest problem is the idea that tax cuts “cost” the government money. For that to be true, one must start from the premise that the money rightfully belongs to the government, not those earning it. That is fundamentally wrong.
Of course, the lamentations of Democrats over increasing the deficit ring hollow. They cheered the nearly $10 trillion of new debt under Barack Obama; indeed, they demanded even more spending, not less.
Under Obama, America suffered its worst economic recovery since the Great Depression. Obama became the first president to never achieve a single year of 3% GDP growth, averaging just 1.5%. But President Trump’s aggressive agenda to slash regulations and enact pro-growth policies has jump-started the economy, with two 3%+ quarters in his first year. That creates a problem, though. The $10 trillion in debt under Obama was created with essentially 0% interest rates, but as the Trump economy heats up, interest rates rise, so the cost of servicing the national debt rises. The more money taken in taxes to pay interest on the debt, the less for private investment and consumer spending, creating a dampening effect on the economy.
The reality is that the national debt will never be paid off by making the “rich” pay their “fair share,” for several reasons. First, the top 1% pays nearly half of all federal income taxes, and the bottom 50% pay almost nothing. Taxing the most productive people even more is a disincentive for additional work and investment. Why work more if Uncle Sam is going to take half? Second, if government took 100% — every dime — earned by the top 1%, it would fund the government for about six months. After we’ve completely robbed the “rich,” who do we rob next? Third, spending is far outpacing revenue growth.
Obama once told John Boehner, “We don’t have a spending problem.” He couldn’t have been more wrong.
The primary drivers of the national debt are entitlement spending and interest on the debt. Entitlement spending is on autopilot, expanding every year despite shrinking “contributions.” The Social Security Trust Fund has been hemorrhaging red ink for years, and the CBO projects it will be bankrupt in 13 years. That will result in either reduced benefits for seniors or high taxes on the working class, either of which would have a devastating effect on the economy. Likewise, the near-term outlook for Medicare and Medicaid is dismal, with tax revenues unable to keep up with spending growth. By 2028, the public debt will total $82,000 per American.
So what does this mean for the midterm elections?
Democrats are campaigning on a promise to roll back the tax cuts, which seems bizarre considering the benefits of the tax cuts go disproportionately to the lower and middle class.
As for Republicans, the credit they rightfully deserve for the success of the tax cuts — and the pay raises and bonuses that followed — is somewhat negated by their passage of the massive omnibus bill that, while including GOP priorities like military spending increases, was held hostage by Democrats until they secured domestic spending increases. That was probably inevitable with the GOP holding such a narrow majority in the Senate, but it still doesn’t sit well with a party whose voters have long demanded some fiscal sanity.
While the vote on a Balanced Budget Amendment this week is little more than an election year gimmick, there is another opportunity for Republicans to energize their base; use the 1974 Impoundment Act to “claw back” some of the spending allocated in the omnibus bill. The advantages of this are that it can be done with a simple majority vote in the House and Senate, it is not subject to a filibuster, and it is automatically fast-tracked in both houses of Congress. It wouldn’t negate all of the wasteful spending of the omnibus, but it would be a good start and would show Republican voters, in what will be an election won by turning out the party base, that Republicans are doing more than paying lip-service to fiscal responsibility.
And it might just give the GOP the edge it needs to once again buck historical trends and avoid a Democrat wave in November.