The US' Congressional Budget Office warned earlier this month that the country will start running $1 trillion deficits in 2020, and that the national debt will be nearly as large as the economy in a decade. A new report from the Tax Policy Center says that that as grim as those projections from the CBO may be, they may understate the case.
TPC’s Alan Auerbach, William Gale and Aaron Krupkin argue that in several instances, the CBO’s economic and political assumptions are overly optimistic, and that more realistic scenarios produce even larger deficit projections, The Fiscal Times online reported.
A more negative outlook emerges once the authors make adjustments for:
Recession Risk: The CBO assumes the economy will be at full employment on average for the next 10 years. A more realistic outlook would include the likelihood of a recession at some point, which would significantly reduce federal revenues and increase expenses, producing a larger deficit.
Permanent Tax Cuts: The CBO assumes that the temporary individual tax cuts will be allowed to expire after 2025, but there’s a good chance that congress will extend them, largely for political reasons. If lawmakers do extend the cuts, the debt-to-GDP ratio will reach 106.5% in 2028, well above the CBO’s current projection of 96%.
The Long Term: The CBO analysis stops at 2028, but the fiscal outlook gets worse beyond the 10-year window. As the deficits grow larger, the spending cuts required to bring them back to the current level relative to GDP grow larger as well.
“The longer policy makers wait to institute changes, the larger those adjustments would have to be to hit a given debt target in a given year,” the authors write. “Moreover, over a longer horizon, the required annual adjustments are much larger, because the projected fiscal trajectory under current policy continues to deteriorate.”
10-Year Yield Tops 3%
Yields on 10-year treasuries hit the widely watched and psychologically significant 3% level Tuesday for the first time since January 2014, continuing a months-long climb that has been driven by expectations of rising inflation and the possibility that the Federal Reserve might quicken its pace of rate hikes in response, Bloomberg reported.
Higher interest rates increase the cost of government borrowing, making it more expensive to service the growing national debt. The cost of interest on the debt is projected to grow more quickly than any other major component of the federal budget, according to the CBO, which estimated this month that spending on interest payments will nearly triple by 2028, rising to $915 billion that year.
CBO projected that net interest costs will grow larger than the defense budget by 2023 and exceed non-defense spending by 2025.
Tax Cut Favors Billionaires
If many average Americans aren’t noticing the tax cut bill yet, it might be understandable—it benefits the wealthy by design. And a congressional report released this week shows that one specific new deduction for so-called “pass-through” companies is heavily benefiting the rich, Vox reported.
The Joint Committee on Taxation on Monday released a report outlining some of the initial effects of the tax law passed in December. The committee estimates that the owners of pass-through entities—companies organized as sole proprietorships, partnerships, LLCs, or S corporations that don’t pay corporate income taxes—will save $40.2 billion in 2018 thanks to the tax bill.
Of that total, $17.4 billion will go to individuals and households making more than $1 million per year. (Revenue estimators are based on tax returns, so a married couple filing jointly is one taxpayer, and a married couple filing separately are two.)
By 2024, the committee estimates pass-throughs will save $60.3 billion on taxes via the new law. More than half of the benefit—$31.6 billion—will go to individuals and households earning more than $1 million.
Pass Through Entities
Pass-through companies have their income “passed through” to their owners to be taxed under the individual income tax rate instead of the corporate rate. The vast majority of US businesses are pass-throughs, including those owned by President Donald Trump—his Trump Organization is structured as a collection of pass-through entities.
Under the previous tax law, such companies could be taxed as much as 39.6%, the individual rate for the highest earners. Under the new tax regime, pass-throughs get to deduct up to 20% from their income before they’re taxed.
Aaron Krupkin and Howard Gleckman, analysts at the Tax Policy Center think tank, called the deduction “extremely generous” for those who qualify it, noting the law as its written is complicated to navigate.
