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OPINION

Taxes Must Rise to Avoid a Fiscal Train Wreck

Taxes Must Rise to Avoid a Fiscal Train Wreck
(Dreamstime)

Peter Morici By Thursday, 23 May 2024 11:01 AM EDT Current | Bio | Archive

Whoever wins in November, the federal government faces daunting fiscal challenges, and Americans should pay higher taxes.

The CBO projects the federal deficit will grow from 5.6% of GDP this year to 6.0% in 2033. Debt held by the public will increase from 99% of GDP to 114% and continue rising afterwards.

Those projections assume 2% inflation and real GDP growth, interest rates fall significantly from current levels, non-defense discretionary and defense spending only grow in line with inflation and current laws remain unchanged.

Defense spending would fall from 3% of nominal GDP to 2.5% by the mid-2030s. But to defend both Europe and prepare for war in the Pacific would require a 25 to 50 percent greater force capability—that would require substantially more military spending.

The 2017 Tax Cut and Jobs Act simplified and cut individual income taxes and lowered business taxes—the combined average federal and state corporate rates at 26.5% is now just about in line with rates in Europe.

The TCJA was passed under reconciliation rules, which required no negative budget deficit impacts beyond a 10-year window. Consequently, under current law, most of the individual tax cuts expire at the end of 2025 but most of the corporate tax reductions continue.

If former President Donald Trump is elected again, the TCJA will likely be extended. Whereas President Joe Biden’s proposed budget would effectively repeal the benefits for families with incomes over $400,000, raise taxes on the wealthy and boost the federal corporate rate from 21% to 28%.

Most of Mr. Biden’s tax increases are unlikely without the Democrats winning control of Congress, but the Senate electoral map is more favorable to Republicans this year.

Extending the TCJA would cost at least $3.3 trillion through 2033 and that would raise the debt held by the public to much more than 114% of GDP by 2033.

Borrowing costs would rocket.

Last July, the Treasury announced a substantial increase in its borrowing requirements to rebuild cash balances after the budget ceiling standoff in Congress. That instigated a full percentage point jump in the 10-year Treasury rate to nearly 5% by late October.

Without permitting the personal income tax provisions of the TCJA to expire or other radical changes, the debt will grow to at least 120% of GDP over the next several years. Interest payments would likely be at least 6% of GDP and be growing faster than nominal GDP.

This could instigate a flight from Treasurys in international markets—effectively, a vote of no-confidence in the dollar as the reserve currency and a rise in the prominence of the Chinese yuan.

Either the Federal Reserve would permit interest rates to rise, limiting investment and growth, or it would print money to purchase Treasurys. The latter would instigate significant inflation that would act as a tax on living standards to fund the government.

Mr. Trump has proposed a 60% tariff on imports from China and a 10% tariff on all other imports. Also he is reportedly considering lowering the federal corporate tax rate from 21% to 15%—that would approximately cost an additional $250 billion through 2033.

In 2023, U.S. goods imports were $3.1 trillion with an average tariff of about 2.2%. Mr. Trump could afford to maintain the TCJA personal income tax cuts and lower corporate taxes by imposing his import tariffs, but that would also require letting defense spending continue to decline as a share of GDP per CBO current projections—not a likely prospect.

Important in all this, the price elasticity of export demand for Chinese goods appears quite low. Additional tariffs won’t lower the volume of U.S. purchases much.

In a nutshell, Mr. Trump’s proposals would leave the nation’s finances on track for a train wreck.

Higher tariffs would be partially paid by foreign producers, but most would be borne by consumers. Relying on tariffs would be more regressive than letting the TCJA personal tax provisions expire, because poorer households spend larger shares of their incomes and save less than the wealthy.

Leaving the federal corporate tax at 21% would be desirable, because we have significant evidence that TCJA encouraged more business investment. Raising it to 28% would give us the highest combined national and subnational rate among large western industrialized countries.

Many of the new investments in AIespecially foundation models—are being financed by retained earnings from Big Tech. Reducing that pool of capital threatens U.S. leadership in AI, and the funds needed to catch up the U.S. industry in electric vehicles and batteries and buildout a greener energy system.

To accommodate adequate defense spending, avoid draconian cuts in the benefits to seniors and the social safety net and invest in new industries either America will have to embrace much higher personal income taxes or suffer slower growth and significant inflation.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

© 2024 Newsmax Finance. All rights reserved.


Peter-Morici
Whoever wins in November, the federal government faces daunting fiscal challenges, and Americans should pay higher taxes.
taxes, economy, trump, biden, national debt
828
2024-01-23
Thursday, 23 May 2024 11:01 AM
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