GOP stymied over expiring tax cuts
Most experts say sunsets discourage long-term funding.
WASHINGTON — Senate Republicans have run into a problem with their proposed tax cuts: Under Senate rules, the cuts would expire after 10 years.
Problem is, most economists say temporary tax cuts would swell the national debt while doing little for economic growth. And without faster growth, few individuals would stand to benefit from the pay raises and job gains being promised by President Donald Trump and Republican congressional leaders.
“We have identified this consistently as one of the fundamental principles of tax reform,” said Jared Walczak, a senior policy analyst at the conservative Tax Foundation. “Any time you build in a sunset, you’re encouraging businesses to not make the long-term investments.”
Businesses that are considering making investments that might span decades, for example, would need to know that the Republicans’ proposed 20 percent corporate tax rate won’t jump back up to the current 35 percent in a few years.
It is a theory rooted in the work of Milton Friedman, the Nobel Prize-winning economist who argued that individuals and businesses make economic decisions based on what they expect their net income to be over the long run.
Though Republican leaders accept this theory, they have yet to show that they could make their tax cuts last beyond 2027. Enacting permanent tax cuts that would raise the deficit after a 10 year-period would need 60 votes in the Senate. So instead, Republicans intend to cut taxes with a simple majority that wouldn’t require Democratic votes.
Within the 10-year period, its budget would allow the Senate to add up to $1.5 trillion to the national debt. Beyond 10 years, they couldn’t add any debt. So the tax cuts would expire if not paid for.
Temporary tax cuts, Republican leaders concede, wouldn’t achieve the key economic benefits that Trump has said would flow from their bill: sustained annual economic growth above 3 percent and yearly income gains averaging of $4,000 per household.
The potential consequences of the Senate plan released Thursday are still being calculated. But if the tax cuts in the House plan were made permanent, the national debt would surge by at least $6.3 trillion through 2040, according to an analysis by the Penn Wharton Budget Model. This, in turn, could create an additional drag on the economy because a rising debt makes it harder to accelerate growth.