I remember when the Tax Cuts and Jobs Act (TCJA) passed. One of the notable features of TCJA that made me a happy camper was a lower income tax level for nearly everyone. I remember that first paycheck with the lower income tax rates. It was the equivalent of getting a four-percent raise at work. As I pointed out in my analysis of the TCJA in early 2018, one of the features I disliked about TCJA is that the income tax cuts were not permanent. Unless Congress takes action, the income tax rates will revert back to pre-TCJA rates after 2025. It is more than the distorting effects of higher income taxes or the fact that an estimated 62 percent of Americans (myself included) will see their income taxes increase after 2025.
As I brought up in 2013, income taxes, like all taxes, are in some way distortive. Taxes have two main functions: to collect government revenue and to disincentivize behavior. In the case of income tax, it creates a disincentive to work. Granted, the size of that disincentive depends on one's circumstances and thresholds for paying the tax. Nevertheless, a disincentive exists. As the Right-leaning Tax Foundation brings up in its recent analysis, keeping the income taxes lower means "boosting incentives for workers and leading to more total hours worked and more output." Although it would mean $3.6 trillion less in government revenue, it would also mean a GDP boost of 0.6 percent and 800,000 more FTE jobs over the next decade.
It is more about the tradeoff between higher economic growth versus lower government revenue. Let us assume that the tax cuts expire, much like the Congressional Budget Office (CBO) does in its Update to the Budget and Economic Outlook from last month. Even with the revenue generated from the pre-TCJA income tax rates, the U.S. government is still nowhere near what it would need to close the gap between expenditures and revenue.
Why is the gap between expenditures and revenue such a problem? The CBO also answers that question. Hint: it is not because the rich are not paying their "fair share" in taxes, whatever that means. If you go to the spreadsheet for the report, specifically for Table 3-1, you will see that the answer is that the increase in debt is driven by ballooning government spending.
This is hardly a new theme here on the blog Libertarian Jew. I illustrated this point using CBO reporting as early as 2013. When the credit rating firm Fitch downgraded the United States' credit rating again in 2023, I sounded the alarm about the U.S. needing to get its government spending under control. I did so once more only this past March.
The national debt is not as urgent as the Big Bad Wolf knocking on the door of the Three Little Pigs and threatening to eat them. It is more like termites eating away at your house. It does not do harm if you do not take care of it this very second. However, if you let those termites continue eating away at the foundation, the house will crumble over time. The house here is the U.S. economy.
Talking about the economy is not some abstract concept. It affects the purchasing power of everyday citizens. As I brought up in December 2020, not addressing debt will make it harder to save, retire comfortably, and enjoy a high quality of life. The projections in the CBO reporting get progressively more dire with the passage of time because we have not hired the metaphorical exterminator to get rid of the excess government spending. Until we do, the CBO projections are only going to get uglier over time.
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