A tax cut in exchange for more federal debt? Some taxpayers consider the tradeoff.(Read article summary)
It is a good bet that Congress will cut taxes next year. A small, informal survey of a few taxpayers offers insight on how it would affect some Americans.
It is a good bet that Congress will cut taxes next year. We don’t how big the tax cut will be, but we do know that the plan President-elect Trump described during the campaign would add $7.2 trillion to the $19 trillion debt, according to my colleagues at the Tax Policy Center. In other words, without offsetting spending cuts that Trump has yet to describe, it would be a giant tax cut that the US can’t readily afford. Would it be worth it?
Economists and tax policy experts debate this issue all the time, but what about average taxpayers? It’s not easy to relate to numbers of this size, so I asked a few dozen of my friends to visit the TPC 2016 election tax calculator to figure out what would happen to their own after-tax income under Trump’s tax plan. Then I asked if they were willing to accept more government debt in exchange for a tax cut. Fourteen people responded to my completely unscientific, but still instructive, survey.
First, let’s look at their taxes.
Nine of those who answered my survey are married. All but one of the couples have dual incomes. Five are single. The respondents range in age from their early-30s to mid-60s.
All but one of the couples would get a tax cut, ranging from about $100 to nearly $10,000. One couple (with an adjusted gross income of about $95,000) would pay slightly more under Trump’s plan.
Among the five single filers whose incomes range between around $40,000 and $100,000 per year, one would get a tax cut while four would see their taxes rise under Trump’s plan, including the two single parents. One would see taxes jump by $2,000. Some of my friends are not happy.
What would my friends getting tax cuts do with the money?
Said one married mother of three: “For the $100 tax cut, I might go buy a pair of shoes.”
Another married woman: “With no kids, we would most likely spend the extra [$2,407] on travel.”
Said one working mother of two, who’d pay nearly $10,000 less in federal income taxes: “Well, that’s more to sock away in the kids’ 529 plans.”
And a married parent of two adult children: “To be honest, unless I actually got a check in the mail for $2,000, I wouldn't particularly notice.”
But what about the ballooning federal debt? For most respondents, a tax cut makes little sense to them, given the debt.
One small business owner encapsulates their thinking: “I think the government should have to run its budget just as any household does and balance. We should never add to the deficit. Does that mean I will have to pay more? Probably. Does that make me happy? No.”
A 33-year-old merchandising professional said: “A tax break is nice but given the option I would reject it if it meant a higher national debt that could affect programs I might need later in life.”
Still, she wondered if other millennials agreed. “I would theorize that for most people [of our age] in similar circumstances the annual budget deficit and growing federal debt has zero impact on their minds let alone their actual pockets. [They] are still single, living at their parents’ house.”
And she may be on to something. One 40-something parent admitted: “I don't think about the debt much. I suppose it makes me naive, but it doesn't factor into my decisions.”
A professional in the tech industry shared that “The budget deficit and growing federal debt are areas that I actually don't know very much about. I’m not sure if debt is inevitable and [what amount] is reasonable.”
He highlights a long-standing argument among economists. Consider last year’s debate between TPC’s Bill Gale and UC Berkeley economist Brad DeLong. Gale argued that the long-term fiscal outlook is dire and, if left unchecked, will curtail long-term growth. DeLong argued that low interest rates meant it was an ideal time to spend and invest, and not worry about long-term debt.
Of course, that was then. While interest rates have been historically low since the 2008 recession, 10-year Treasury rates have risen by a full percentage point since July and by more than a half a point just since Election Day. And the Federal Reserve will almost certainly raise interest rates at its December meeting. Gale and his UC Berkeley economist co-author Alan Auerbach predict that even if government policy does not change and interest rates stay constant at current levels, the debt-to-GDP ratio would rise to 110 percent by 2041, up from its current 75.6 percent.
That growing debt raises two questions. When will the increasing interest payments begin to limit the government’s ability to finance programs it needs—or we want? And when it does, what tradeoffs will we be unwilling to make?
A Trump-sized tax cut doesn’t seem like a palatable deal for most of my surveyed friends. Still, they could easily imagine what they’d do with the extra money. Bad swap or not, it’s not instinctive to think past today’s bank accounts and bills.
We’ll likely see a tax cut in 2017. That’s in part because few voters are likely to call their elected officials next year to demand, “Do not cut my taxes.”
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns.
This story originally appeared on TaxVox.