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Trump Tax Cut Renewal Is Winning Wall Street, But Could Cost $4.6 Trillion

It's not true of Trump's 2017 tax cuts, and it won't be true if they're renewed in 2025. That sets up a big political fight over how - and even whether - to pay for them.

By Newsd
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Trump Tax Cut Renewal Is Winning Wall Street

Trump Tax Cut Renewal Is Winning Wall Street: Donald Trump’s promise of more tax cuts next year is helping him woo Wall Street donors, but it threatens to add trillions to the national debt.

Many Republicans reject cost projections, asserting that tax cuts pay for themselves through economic growth, despite the estimated $4.6 trillion cost of extending the expiring portions of Trump’s tax cuts next year.

It’s not true of Trump’s 2017 tax cuts, and it won’t be true if they’re renewed in 2025. That sets up a big political fight over how – and even whether – to pay for them.

As a result of the deficit-financed Trump tax cuts, multiple rounds of pandemic stimulus, and the Biden administration’s clean energy, infrastructure, and chip manufacturing initiatives, the nation’s debt load and interest costs are much higher this time around.

Investor demand for 10-year US Treasury bonds nearly doubled from 2.4% in 2017 to 4.3% on Thursday as US government debt held by the public soared from 76% of GDP to 97% of GDP in December. Net interest payments by the federal government rose from $263 billion to $890 billion this year — more than the Defense Department budget.

As the Baby Boom generation retires, Social Security and Medicare are projected to run out of money in 2033 and 2036, respectively.

Republican politicians deny the cost of tax cuts, but some conservatives propose reducing the deficit by targeting programs favored by Democrats. Social Security and Medicare will be cut over time, Biden’s clean-energy tax breaks will be reversed, other tax breaks will be slashed, and other social programs will be cut.

The president has also floated a large increase in tariffs on imported goods, which would increase consumer prices but could partially offset the cost of extending tax cuts.

A Congressional Budget Office report in May estimated that extending the 2017 law’s expiring tax cuts on personal income, large inheritances, and pass-through businesses, which include many small and medium-sized businesses, would cost $4.6 trillion over the next decade. Corporate income tax rates were permanently lowered by the law.

By 2054, projected debt as a share of GDP would rise to over 200%, according to an analysis from the left-leaning Center for American Progress.

The loss of revenue caused by maintaining tax cuts could be partially offset if more investment, jobs, and growth were to result. According to the nonprofit Committee for a Responsible Federal Budget, this dynamic effect would only recover 1% to 14% of the revenue lost.

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Since 2001, when the federal government recorded a surplus, Congress has routinely increased spending and cut tax rates to offset the revenue loss.

The deficit has been trumped for decades by short-term priorities, said Rohit Kumar, a former senior tax adviser to Mitch McConnell.

It is impossible to get a $34 trillion national debt without that being persistently true, said Kumar, now a principal at PwC.

In response to the expiration of the Bush tax cuts, Joe Biden has a simple solution: extend the lower rates for individual taxpayers making less than $400,000. He would then raise taxes on corporations and the wealthy to cover the cost.

Treasury Secretary Janet Yellen told Bloomberg Television last month that the Trump tax cuts “caused a huge increase in the deficit.”

That’s not how Trump and other Republicans see it.

“When we cut taxes, the federal government actually took in more revenue the following year because our economy took off when we brought jobs back to America,” House Majority Leader Steve Scalise of Louisiana said recently.

So, who’s right? Economists largely agree that Scalise’s claim is misleading. Corporate income tax revenue took a big hit after the rate cut, coming in lower in both 2018 and 2019, before the pandemic rocked the US economy.

It bounced back strongly, however, in 2021 as the country recovered from the pandemic. Republicans point out that revenue from corporate tax in 2022 and 2023 exceeded projections the CBO made in 2017 before the tax cut.

Conservative economist Douglas Holtz-Eakin wrote in an April blog post that the post-pandemic surge in revenue shows the country “does not need” the higher prior corporate tax rate. “In this sense, one might argue the rate cut paid for itself,” he added.

But that doesn’t account for the role of other economic changes.

For a start, inflation after the pandemic was much higher than the CBO previously projected. Corporate profits as a share of GDP also rose during the pandemic as companies raised prices more than their costs, and the Federal Reserve dramatically cut interest rates during the pandemic.

In reviewing a raft of research through 2021, William Gale, co-director of the nonpartisan Tax Policy Center, concluded that “every credible analysis of the fiscal effects” of the law found it “reduced revenues significantly.”

Harvard Professor Gabriel Chodorow-Reich found the changes to the corporate tax rate and expensing rules had a meaningful, positive impact on how much firms invested. But that didn’t come close to offsetting the enormous cost to the budget.

“It’s not a huge amount of additional growth, and we’re losing quite a bit of revenue,” Chodorow-Reich said.

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