This paper is the second in a series seeking to examine the nation’s fiscal situation following the passage of the Tax Cuts and Jobs Act. As this study aims only to evaluate the impact that the tax reform legislation had on the deficit, the effect of the recently-passed Bipartisan Budget Act (BBA) of 2018 will not be included in this analysis. The next paper in this series will incorporate the BBA’s fiscal impact and attempt to set a blueprint for reform to address the national debt.
With the Tax Cuts and Jobs Act (TCJA) becoming law, there are many reasons for Americans to celebrate. The vast majority of American taxpayers will see a reduction in their tax liability for this upcoming tax year, the tax code has been simplified, pro-growth provisions will boost economic growth, and many workers can expect their wages to increase. Yet even so, American taxpayers have a right to know what impact $1.5 trillion in tax cuts will have on the federal government’s balance sheet. Is the tax bill going to “blow up” the deficit, leaving the country with no choice but to slash popular programs, as some suggest? Are taxpayers going to end up having to pay higher taxes in the future because of this bill? Fortunately, recent legislative fumbles such as the BBA notwithstanding, the fiscal discipline to address the nation’s deficit remains achievable through modest spending restraint.
While the federal government has already racked up a total debt of over $20 trillion, it will only grow larger in coming years. Data in this analysis will refer solely to debt held by the public, or the amount that the federal government borrows (excluding intragovernmental debt). Prior to the passage of the TCJA, the Congressional Budget Office (CBO) estimated that without a course correction, the publicly-held debt would increase from 78 percent of GDP this year to upwards of 150 percent of GDP in 2047.
Such a sizeable debt has consequences beyond simply putting taxpayers on the hook for staggering amounts of money in the future. Nearly 6.7 percent of federal expenditures in FY 2017, or $269 billion, went towards paying interest on the debt the federal government owes. This represents 44 percent as much money as was spent on total non-defense discretionary spending. As the debt grows larger, the cost of servicing the debt will continue to increase. Meanwhile, investors buying up new government debt will require higher interest rates to justify loaning money to the federal government, making the debt that is being accumulated more costly. Rising debt can become a vicious circle.
Debt accumulation can have other consequences as well. The more the federal government borrows, the less that Americans are investing in more economically profitable ventures. Government debt therefore “crowds out” investment by the private economy, which tends to be more effective at investing. A high level of debt can also limit the federal government’s options when it comes to responding to economic crises—for instance, by preventing the government from introducing an economy-boosting tax cut in the case of a recession.
One of the most effective ways to manage a growing national debt is to grow the economy. The Congressional Budget Office (CBO) estimates that an annual 0.1 percent increase in GDP growth will increase revenues by $315 billion over ten years. Last June, before the passage of the TCJA, CBO projected that GDP growth will remain at a relatively stagnant 2 percent for the foreseeable future. Credible analyses show that the tax reform bill can help increase long-run GDP by 3.5 percent or more.
The Impact of the TCJA on the Deficit
First and foremost, it is important to put the impact of the bill in context. How much larger is the deficit over the next ten years with the tax bill in place? Table 1a illustrates the impact of tax bill on the deficit over the next budget window using the Tax Foundation’s dynamic revenue estimates.
Many provisions of the TCJA that are set to expire will likely be extended. NTUF’s Demian Brady has created a new budgetary baseline by making reasonable assumptions on extensions of current policy and including the Joint Committee on Taxation’s score of macroeconomic feedback from the TCJA. Table 1b estimates the 10-year deficit impact under the NTUF current policy baseline, using dynamic revenue estimates provided by the Tax Foundation.
Given that the federal government deals with such large sums of money on an annual basis, even deficit figures must be considered in the context of the debt as a whole. Table 2 shows the percentage change of the debt for each of the next ten years. Over the course of ten years, the debt would only increase by 1.7 percent more than it would have prior to the passage of the TCJA. Under the NTUF baseline, debt would increase by approximately 5.5 percent more than under previous law.
One of the most common methods of measuring the fiscal health of a country is to look at its debt-to-GDP ratio. This can be a much more revealing indicator of the severity of a nation’s debt than an out of context dollar figure, which does not take into account the size of the nation in question and its capacity for debt. Greece, for example, has a national debt that is around $400 billion, which fails to come close to the total amount of debt the United States owes. However, Greece is currently in a far worse fiscal situation, given that its debt-to-GDP ratio is fast approaching 200 percent.
A look at the outlook for debt-to-GDP ratio under the TCJA relative to the debt-to-GDP ratio outlook prior to the TCJA’s passage suggests that the TCJA actually puts the nation in a more fiscally healthy position. Assuming all provisions that are currently set to expire do so, Table 3a shows that the TCJA would leave the country with a debt-to-GDP ratio that is approximately a percentage point lower in 2027 than would be the case under current law. Under this assumption, the debt would be 1.73 percent higher in 2027 than was estimated prior to the passage of the TCJA.
|Debt as a % of GDP Prior to TCJA||76.65||79.66||82.08||84.93||87.98||91.49||94.95||98.37||102.29||106.62||111.23|
|Debt as a % of GDP Under TCJA||76.65||81.81||85.60||89.50||93.09||96.49||99.43||101.99||104.78||107.19||110.06|
Of course, this is an unlikely scenario. The NTUF baseline provides a more probable picture of the state of the debt to GDP ratio over the next ten years. Under the NTUF baseline, the debt would be 5.49 percent higher in 2027 than was estimated prior to the passage of the TCJA. As Table 3b shows, the debt-to-GDP ratio is estimated to be approximately 3 percent higher ten years from now.
|Debt as a % of GDP Under NTUF Baseline||76.65||79.85||83.12||86.67||90.15||93.83||97.25||100.54||104.28||108.98||114.20|
While the TCJA does grow the deficit and the debt, it also provides the opportunity to consider how our current debt situation can be navigated. Through economic growth generated by market-based policies, the country can begin to make its fiscal situation more manageable. By cutting the corporate rate and allowing full expensing for five years, the TCJA will boost the economy.
However, the TCJA is also clearly not enough on its own to fix the national debt. On an annual rate since 1940, federal spending has averaged 19 percent of GDP, while the tax receipts flowing into the Treasury have averaged 17 percent. Addressing this gap will require fundamental reform to entitlement programs, which comprise around 60 percent of federal spending and are projected to be the source of 80 percent of the projected growth in government spending over the next ten years.
With this in mind, the greater threat to fiscal security is Congress’s inability to spend within its means. The recent budget deal in which both sides mutually agreed to raise spending by at least $300 billion over two years is symptomatic of this profligacy. With or without the TCJA, the debt will continue to be an unmanageable issue until Congress takes it upon itself to put its fiscal house in order.
The next paper in this series will examine the ways in which Congress can begin to address the issue of the debt. However, it is clear that the TCJA is not the primary driver of the federal debt—and in fact can be a step along the road to solving it.
About the Author
Andrew Wilford is an Associate Policy Analyst with the National Taxpayers Union Foundation.
 Note that several provisions in the TCJA are set to expire before 2027 due to Byrd rule constraints, though the bill’s authors intend to extend those provisions. This can cause deficit impact figures to appear more generous than they are. NTUF’s Demian Brady has previously explored the effect that the Byrd rule had on the process of drafting the TCJA.
 Data on the year-by-year dynamic impact of tax reform legislation and year-by-year dynamic revenue estimates was provided to NTUF by the Tax Foundation.
 The NTUF baseline makes reasonable assumptions about extensions of expiring policies and uses JCT data for dynamic revenue estimates. As such, the NTUF baseline may be slightly pessimistic in its revenue estimates.
 Uses the CBO June update for data prior to passage of the TCJA, and Tax Foundation dynamic revenue projection for data prior to the passage of the TCJA.