Tax cuts put pressure on Medicare, Medicaid spending
Elections, analysts often say, have consequences. But so does major legislation, like the far-reaching tax bill.
If President Donald Trump and Republican congressional leaders are correct, the complex measure will benefit most tax-paying Americans, cutting their taxes and spurring increased economic growth. But if Democratic opponents and many economists are right, the wealthy and corporations will be the main beneficiaries, while most Americans wonder what the fuss was all about and lawmakers are left to cope with the political and substantive fallout.
Unless public skepticism eases, many of the bill’s Republican supporters may spend next fall explaining why so few of their constituents are paying notably lower taxes. But the substantive fallout could begin sooner, as GOP leaders seek to use the expanded deficits stemming from the bill as their latest excuse to cut back federal domestic programs that benefit the people who got the smallest benefits.
Indeed, even as Congress was finishing the bill, House Speaker Paul Ryan referenced it in renewing his prior call to cut Medicare and Medicaid. “We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit,” Ryan said during an appearance on Ross Kaminsky’s Denver talk radio show, citing “the health care entitlements” as the principal drivers of the federal debt.
Ryan was right that those entitlement programs are the principal long-term contributors to the deficit. But in the past, the Wisconsin Republican has pushed an unpopular partial privatization of the Medicare system, including a reduction in the amount of federal support, even though many experts believe much of the long-term problem can be solved with modest increases in payments by wealthier recipients and reductions in their benefits.
The first problem lawmakers may face next year stems from the likelihood the tax bill won’t pay for itself. And even if it does provide a modest increase in federal revenues, the government will still face a substantial shortfall in revenues for financing existing programs, putting pressure on lawmakers to make more cuts in both Medicaid and in other health, education and food programs that primarily benefit the poor.
Seeking such cuts in 2018 may be especially difficult, since it will almost certainly have to be done through the normal federal funding process. That means any reductions will need some Democratic support, at least in the Senate, unlike this year’s strictly partisan process to dismantle Obamacare and cut taxes.
That could be a problem, not only for most Democrats but also for Republicans already facing a political backlash from voting to deprive many Americans of their health care coverage and increase the costs for others. That will be especially true for GOP lawmakers from states where limiting the deductibility of state and local taxes will mean tax increases, rather than cuts.
Of course, many congressional Republicans most likely will view the bill as a way both to help their political donors and business supporters and to “starve the beast” by depriving the federal government of revenues at a time when a consensus for increasing defense spending makes domestic programs the budget’s most vulnerable sector.
Ironically, one of the first to make that connection was a noted liberal economist, John Kenneth Galbraith. Opposing President John F. Kennedy’s plan to cut taxes in 1962, Galbraith warned, “Lower tax revenues will become a ceiling on spending.” Republicans soon picked it up. In 1978, Republican economist Alan Greenspan told Congress, “The basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”
That limit has often proved elusive, and that may again be the case next year. Most likely, congressional Democrats will join moderate Republicans to block any significant efforts to reduce the government’s safety net.
As for the longer term, an interesting forecast of the potential fallout came last week from MSNBC’s Lawrence O’Donnell, once the top staffer on the Senate Finance Committee. Any large tax cut, he warned, will complicate life for Democrats at whatever future date they regain power and try to do more for poor and middle-class Americans. To do so, he said, they may have no choice but to seek restoration of some of the 2018 tax cuts, at least in the upper brackets, potentially playing politically into the GOP’s hands.
Still, if Trump is correct, there may be enough money to both extend the cuts and finance necessary programs. But few expect such a rosy scenario.