Tax Cuts Could Make It Harder to Fight the Next Recession

CNN/ Newswire | 12/5/2017, 7:52 a.m.
The Republican tax plan could squander some of Congress's precious recession-fighting bullets on a healthy economy.

Matt Egan

(CNN Money) -- The Republican tax plan could squander some of Congress's precious recession-fighting bullets on a healthy economy.

By deepening the national debt at a time when the economy doesn't need help, the tax overhaul threatens to leave Congress with less wiggle room to respond when recovery from the Great Recession eventually dies.

Normally, presidents ask Congress to borrow vast sums of money to pay for tax cuts when the economy needs to be rescued from trouble. But President Trump is on the verge of enacting a $1.5 trillion tax plan with an economy enjoying its best growth in three years.

"We should be paying down the debt now, so if we have a war or recession and we need to use tax cuts or increase government spending we're in a position to do so," said David Kelly, chief global strategist at JPMorgan Funds.

U.S. national debt held by the public has nearly tripled over the past decade to nearly $15 trillion today.

"It's wrong to deficit-finance a tax cut in a full employment economy when we already have high deficits," he said.

Republicans argue that the tax plan -- which would slash the corporate tax rate to 20% from 35% and encourage companies to repatriate overseas profits -- will pay for itself with much faster economic growth.

Independent analysts doubt that. In fact, the Joint Committee on Taxation, the Congressional scorekeeper for tax bills, estimates the Senate tax bill will only generate enough growth to create about $408 billion in net new revenue over the next decade.

That means even including the economic boost from the tax plan, the bill would still add about $1 trillion to deficits. In other words, the tax cuts may pay for less than one-third of their cost.

"It could leave the government with fewer bullets during the next downturn," Jaret Seiberg, managing director at Cowen Washington Research Group, wrote in a report.

Debt problem 'should keep people awake'

The eight-year-old recovery from the Great Recession hasn't been robust, but it has been resilient. It's already the third-longest expansion in history. While few economists anticipate an imminent downturn, another one will come eventually. And when that happens, the government's borrowing costs may not be as absurdly cheap as they are now.

Seiberg wrote that the next recession could be "deeper and longer than it might otherwise be" if the government is unable or unwilling to pile on more debt due to the tax plan.

Goldman Sachs recently warned in a report that larger deficits and rising debt could "reduce the ability to ease fiscal policy in response to an economic downturn."

The Federal Reserve's options may be more limited as well. While the Fed has begun to raise interest rates and shrink its $4.4 trillion balance sheet, both remain near crisis levels.

Fed chief Janet Yellen told Congress last week that America's debt burden is very concerning and "should keep people awake." Yellen indicated the problem will worsen as the country's population ages because spending on Medicare, Medicaid and Social Security will outpace tax revenue.