Is the pain of future debt worth the tax cuts now?

Today I want to talk about a debate surrounding the recent tax cuts: was it worth increasing the national debt today in order to extend them? The tax cuts in question were originally passed in 2017 and were set to expire for individuals at the end of 2025. Unless offset by spending cuts or new revenues, which has not happened so far, the extension of the tax cuts means that the national debt will grow by trillions of dollars in the coming years.

And the debt comes with interest payments, which grow with the debt. Over time, debt and interest payments crowd out other priorities — things like education, infrastructure, or scientific research.

Higher debt also comes with more risk. As debt levels rise, the chances of a fiscal crunch — where investors lose confidence and borrowing costs spike — become more serious. Even without a crisis, simply carrying more debt means the government has less room to respond to emergencies, like an economic crisis or a deep recession.

The benefit of extending tax cuts is that people keep more of their income now. That can feel good for households and businesses alike. Supporters argue that lower taxes will spur investment and economic growth, and that those effects will ultimately “pay for” the lost revenue.

But the long-run benefits of these tax cuts are likely modest. Multiple independent analyses have found that the 2017 tax law had only small effects on long-term growth, and the outlook for extending the tax cuts is mixed, with the most pessimistic projections predicting that the extensions will actually harm growth starting around 2028 by crowding out private investment spending. So if the goal is to create sustained growth, these tax cuts are, at best, a very inefficient and costly way to do it and, at worst, counterproductive.

Originally published at https://mytwocentsandcounting.substack.com.