The nation faces a fiscal reckoning. The deficit has exploded to $2 trillion this year — 7 percent of the nation’s gross domestic product. It is expected to grow to $2.8 trillion by 2034, taking the national debt to 122 percent of GDP. Taming this deficit will be a central task for the next administration.
By the Editorial Board
Figuring out how to raise more tax revenue will be essential to this exercise. Fortunately, big parts of the 2017 GOP tax bill expire next year, which will force Congress and the president to deal with taxes. Unfortunately, neither of the 2024 presidential candidates seems willing to take on the challenge — though their relative levels of irresponsibility are very different.
The most irresponsible is Donald Trump, whose latest gimmick — at a campaign event in Arizona on Thursday — was proposing to eliminate taxes on overtime pay for workers toiling more than 40 hours a week, at a cost of $227 billion, the Tax Foundation finds.
For the elderly, he has offered to stop taxing social security benefits, which would disproportionately benefit upper-income households and, according to the Tax Foundation, raise the budget deficit by about $1.6 trillion over 10 years. To service-industry workers, he has offered to end taxes on tips, which will inflict less damage on the budget but could distort the labor market and employers to shift workers’ pay to tips. He also promised to extend his 2017 tax cuts — which would cost $4 trillion over 10 years, according to the Congressional Budget Office — and trim the corporate tax rate again, from 21 percent to (depending on the day) 20 percent or 15 percent.
Altogether, Mr. Trump’s tax and spending proposals would increase primary deficits — before interest payments — by $5.8 trillion over the next 10 years, or by $4.1 trillion if one includes the positive effect of the tax cuts on economic growth, according to the University of Pennsylvania’s Wharton School.
The Penn Wharton Budget Model does not consider several of Mr. Trump’s ideas, including his new overtime tax exemption and his most dangerous plan: embracing the 19th-century strategy of funding the government with tariffs on imports. This would fuel inflation — raising the price of imports and allowing domestic rivals space to raise prices their own goods — and threaten U.S. industries that rely on imported inputs.
Mr. Trump claims his tariffs will raise so much money the nation will be able to afford child care and have enough left over to have “no deficits within a fairly short period of time.” According to the Tax Policy Center, however, his tariffs would raise barely 8 percent of what the federal government collects in income taxes while costing the typical American household about $1,800 a year.
Kamala Harris has, so far, declined to promise the plethora of tax cuts Mr. Trump has. Her campaign derided his new tax-free overtime idea. Her proposals to expand the child tax credit and the earned income tax credit will cost money but would nonetheless help struggling families and encourage work.
Still, she has not entirely resisted irresponsible promises of her own. She matched Mr. Trump’s no-tax-on-tips giveaway. (She has to win Nevada, with its hotels and casinos, too.) Her big promise, to follow President Joe Biden’s ban on higher taxes from households earning less than $400,000 a year, would exempt about 97 percent of taxpayers.
Ms. Harris’s proposals would come nowhere near reestablishing fiscal balance. The Penn Wharton analysts estimate her plans would add $2 trillion to the primary deficit over the next decade, including growth effects. (Though, as with Mr. Trump’s plan, this number is rough; it does not include all of her proposals, some of which would raise more revenue and some of which would cut it.)
The nation’s delicate fiscal juncture demands more. The federal deficit expanded dramatically because of the covid-19 rescue packages the Trump and Biden administrations approved and because of Mr. Trump’s 2017 tax bill, which cut corporate tax revenue by about 40 percent over a decade.
Many options exist. The University of Chicago’s Eric Zwick and Princeton University’s Owen Zidar recently argued that essentially reinstating the tax code as it was in the late 1990s — a period of high growth and fiscal stability — would raise more than $4 trillion in additional income over a decade. Washington think tanks overflow with deficit plans that also include modest tweaks to Medicare, Social Security and other federal spending. We released our own blueprint last year.
Good tax policy funds the government, avoids favoritism between forms of income and leaves intact strong incentives for growth. The more special interest loopholes and exceptions, and the more artificial distortions in the economy, the less revenue to finance high-quality government services — and the higher the likelihood of a debt crisis.
