The US Congressional Budget Office, in its long-term outlook released in June, projected that federal debt held by the public would increase sharply over the next 30 years, climbing from 78% of GDP this year to 118% in 2038 and 152% by 2048.
But that estimate was required to assume that current law would generally remain unchanged—meaning that, for example, tax cuts currently set to expire after 2025 would in fact end and that spending caps that congress agreed to lift for 2018 and 2019 would be restored for future years. Fiscal Times online reported.
In other words, it baked in assumptions that might be considered unrealistic given the professed desire of President Donald Trump and Republican lawmakers to extend the expiring tax cuts, and given congress’ history of battles over spending limits.
Using different and arguably more realistic assumptions, the debt rises even more dramatically. In a follow-up report issued late Wednesday, CBO said that if the current tax and spending policies aren’t allowed to expire, debt held by the public would rise to at least 148% of GDP by 2038 and 210%—more than twice the size of the economy—by 2048. Under this scenario, debt would reach record levels by 2029, five years faster than under the June projection.
The new CBO report also laid out two other scenarios in which lawmakers adjust tax rules to prevent bracket creep and keep revenue levels steady as a share of GDP, either in 2018 or 2028. Under those scenarios, debt would grow even higher, as this chart from the committee for a responsible federal budget shows.
Economic Impact
The CBO report also warns about the economic impact of higher debt levels. If lawmakers extend current policies, real gross national product per person would be about 1.2% lower in 2038 than if the tax cuts and spending increases are temporary.
The report notes that the debt projections are uncertain and may be too low, especially for later years, since its current models “are based on the nation’s historical experience with federal borrowing” and may not properly reflect the effects of unprecedented debt levels.
“Employing its usual models, CBO projects that in any of the scenarios, debt would equal more than 200% of GDP by 2048—but those models probably understate the increase in debt,” the report says.
Who Gets the 20% Pass?
The treasury department released a 184-page set of guidelines Wednesday seeking to clarify just who gets to claim the new 20% tax deduction on pass-through business incomes. Overall, the rules related to the deduction appear to be fairly generous in allowing business owners to claim the tax break, but there are questions and complaints about the seemingly random nature of who is eligible and who is denied.
While experts are still sorting through the complex rules, here are some details and early reactions:
Who gets to claim the deduction: “In general, owners of partnerships, S corporations, limited-liability companies and sole proprietorships with taxable income of $315,000 or less for joint filers and $157,500 or less for single filers. For owners with higher income, the write-off is often subject to phase-outs and limits,” The Wall Street Journal reported.
“Who doesn’t get the break: Many higher-earning owners of ‘specified service’ businesses. People in this category include doctors, dentists and pharmacists; lawyers; accountants and actuaries; consultants; performing artists; financial advisers and investment managers; and athletes and coaches, including team owners. Real-estate and insurance brokers aren’t in this category.”
Business groups got what they wanted: “Tax experts say it appears to be largely a victory for business groups, who had argued for a more generous interpretation of a deduction that the congressional joint committee on taxation estimates will primarily benefit Americans earning $1 million and up,” according to The Nw York Times. The chief tax policy counsel at the US Chamber of Commerce said the group is “pleased to see the proposed rule’s aggregation approach.”
Trump to Benefit
Trump could benefit: “Some have asked whether the new pass-through regs mean Trump is eligible. We can’t know without him releasing his tax returns, among other things. But it appears he is partially eligible,” tweeted New York University School of Law tax expert Lily Batchelder.
And Democrats have another opening to criticize the GOP tax law: “These new rules confirm that the fortunate few win and Mom-and-Pop shops lose under Trump’s tax law,” said senate finance committee ranking member Ron Wyden (D-OR).
“Small business owners searching for clarity aren’t getting pulled out of a bureaucratic twilight zone any time soon. Many are still left wondering whether their business is blacklisted. For high fliers, the path ahead is paved in gold. Tax planners are already scouring through the nearly 200 pages of regulations in search of new ways to keep wealthy clients from paying their fair share.”
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