In a recent podcast, Tax Analysts’ chief economist Martin Sullivan discussed the latest fiscal projections from the Congressional Budget Office (CBO) and the implications for tax policy. The CBO’s forecast paints a grim picture of growing deficits and debt, with the debt-to-GDP ratio projected to reach 116 percent by the end of the next decade. These numbers, even without factoring in recessions, are unprecedented and concerning.
Sullivan expressed his pessimism about the fiscal outlook, highlighting challenges in reducing the deficit due to rising mandatory spending on programs like Social Security and Medicare. He also questioned the projected decline in defense spending, considering current global tensions. Interest on the debt is expected to triple in the next decade, posing additional financial burdens on the government. Sullivan warned that the current path is unsustainable, with uncertain consequences looming on the horizon.
The discussion also delved into the effects of the Tax Cuts and Jobs Act (TCJA) and a recent study on its economic impact. The study revealed that the TCJA only had a marginal effect on economic growth, with most benefits going to higher-income taxpayers and shareholders. Sullivan emphasized that tax cuts do not pay for themselves and raised concerns about the regressive nature of the TCJA. The study suggested that for every dollar of revenue cut, there was only a 40-cent increase in GDP, indicating limited economic stimulus.
The conversation then turned to the implications of the TCJA’s scheduled expiration in 2025 and the potential for further tax policy changes. Sullivan highlighted the question of tax incidence, pointing out that the burden of corporate taxes falls mainly on shareholders, including some individuals with lower incomes who own stock. This has implications for proposed tax increases under the Biden administration, as some burden may affect households earning below $400,000.
Looking ahead, Sullivan discussed potential future scenarios based on election outcomes, including Republican or Democratic control, gridlock, or compromise. He expressed skepticism about the likelihood of bipartisan compromise given current political polarization. Sullivan suggested a combination of tax increases and spending cuts as necessary steps to address the deficit, including adjusting retirement ages for entitlement programs. However, he acknowledged that addressing these issues would be politically challenging.
In conclusion, Sullivan highlighted the urgency of addressing the growing deficit and debt, emphasizing the need for tough decisions on both revenue and spending. Despite the daunting fiscal challenges ahead, he underscored the importance of taking substantive action to ensure long-term fiscal sustainability. As debates continue on tax policy and fiscal responsibility, Sullivan’s insights provide valuable perspectives on the complex economic landscape facing policymakers.
