WASHINGTON (AP) — Senate Republicans have run into a problem with their proposed tax cuts: Under Senate rules, the cuts would expire after 10 years.
Problem is, most economists say temporary tax cuts would swell the national debt while doing little for economic growth. And without faster growth, few individuals would stand to benefit from the pay raises and job gains being promised by President Donald Trump and Republican congressional leaders.
“We have identified this consistently as one of the fundamental principles of tax reform,” said Jared Walczak, a senior policy analyst at the conservative Tax Foundation. “Any time you build in a sunset, you’re encouraging businesses to not make the long-term investments.”
Businesses that are considering making investments that might span decades, for example, would need to know that the Republicans’ proposed 20 percent corporate tax rate won’t jump back up to the current 35 percent in a few years.
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It is a theory rooted in the work of Milton Friedman, the Nobel Prize-winning economist who argued that individuals and businesses make economic decisions based on what they expect their net income to be over the long run. And that expectation depends, in part, on tax rates.
Though Republican leaders accept this theory, they have yet to show that they could make their tax cuts last beyond 2027. Enacting permanent tax cuts that that would raise the deficit after a 10 year-period would need 60 votes in the Senate. So instead, Republicans intend to cut taxes with a simple majority that wouldn’t require Democratic votes.
Within the 10-year period, its budget would allow the Senate to add up to $1.5 trillion to the national debt. Beyond 10 years, they couldn’t add any debt. So the tax cuts would expire if not paid for.
Temporary tax cuts, Republican leaders concede, wouldn’t achieve the key economic benefits that Trump has said would flow from their bill: Sustained annual economic growth above 3 percent and yearly income gains averaging of $4,000 per household.
“These reforms — these tax cuts — they need to be permanent,” House Speaker Paul Ryan said in a speech last summer. “Every expert agrees that temporary reforms will only have a negligible impact on wages and economic growth. Businesses need to have confidence that we will not pull the rug out from under them.”
But most economists say the tax cuts wouldn’t pay for themselves. So making them permanent would entail further costs. And a steady shortfall in tax revenue could force deep spending cuts to many popular programs involving college, housing or medical aid, among other areas. Or it could require tax hikes. Or the debt could grow and potentially send interest rates up, thereby making it costlier for people to borrow to buy a home or car.
“We should have stability in our tax code, and this introduces instability in multiple ways,” said Jason Furman, a professor at Harvard University and formerly the top economist for President Barack Obama.
The potential consequences of the Senate plan released Thursday are still being calculated. But if the tax cuts in the House plan were made permanent, the national debt would surge by at least $6.3 trillion through 2040, according to an analysis by the Penn Wharton Budget Model. This, in turn, could create an additional drag on the economy because a rising debt makes it harder to accelerate growth.
What lawmakers may or may not do to preserve the tax cuts is one of the unsettled and unsettling questions going into the Senate Finance Committee’s work of the proposal next week.
“We are still working through some details on that,” Republican Sen. Pat Toomey of Pennsylvania told reporters Thursday.
Congressional estimates project the yearly deficit from the tax cuts rising to nearly $220 billion in 2027. Congress could cut all discretionary funding for the Education Department, the Environmental Protection Agency and the Department of Housing and Urban Development and still make it only about halfway toward covering the cost of the additional debt.
Toomey, a member of the Finance Committee, said his goal was to permanently set the corporate tax at 20 percent and establish an international system designed to tax business profits primarily within the United States rather than globally.
He said his preferred way of making the tax cuts permanent would involve scrapping the requirement in the 2010 health care law that Americans buy health insurance or face a tax penalty. This is politically risky given that the Senate tried and failed this year to repeal and replace the health insurance law.
On Wednesday, the Congressional Budget Office estimated that eliminating the individual mandate would save $54 billion in 2027. But it would also deprive 13 million people of health insurance.
There’s also the possibility that Republicans might not pass permanent tax cuts and force Congress years later — when many current members would be out of office — to address the problem.
House Republicans have already suggested that family tax credits set to expire in their proposal after five years won’t actually sunset, because members will vote to renew them. But keeping those credits in place would mean that the national debt would exceed the $1.5 trillion limit over 10 years.
Republicans would be betting that potential tax hikes would upset voters and the economy. They saw this possibility play out during the 2013 “fiscal cliff” when tax cuts that had been enacted in 2001 and 2003 were set to expire. So President Barack Obama signed a deal that essentially preserved many of the expiring tax cuts while returning some rates to higher levels.
“One of the lessons learned from fiscal cliff is that once these tax cuts are in place for 10 years, it’s really hard to take them away,” said Rohit Kumar, a former tax counsel to Senate Majority Leader Mitch McConnell and now an executive at PwC. “Temporary is not really temporary unless you think the government is going to let the corporate tax rate and individual rates jump.”