BIG TAX HIKES ARE COMING / THE WALL STREET JOURNAL OP EDITORIAL

Big Tax Hikes Are Coming

The GOP’s ‘beautiful bill’ increases debt and ignores the coming entitlement bomb.

By William A. Galston

House Freedom Caucus member Rep. Chip Roy in Washington, May 16. Photo: will oliver/epa-efe/shutterstock/Shutterstock

Four members of the House Freedom Caucus voted against President Trump’s “big, beautiful bill” in a House Budget Committee meeting Friday, blocking the proposal from moving forward.

Texas Rep. Chip Roy, one of the holdouts, argued that the bill amounts to a “massive, front-loaded deficit increase.” 

Indeed it was, and it still is, even after what Speaker Mike Johnson described as “minor modifications” induced the four members to vote “present” on Sunday, allowing the bill to move forward.

In a statement Sunday night, the House Freedom Caucus said that the bill “fails to actually honor our promise to significantly correct the spending trajectory of the federal government.” 

So it does. 

Even if the Freedom Caucus succeeded in getting the additional cuts to Medicaid and green energy programs that it has been demanding, the package would still be enormously expensive. 

The bill the House is poised to approve and send to the Senate would increase rather than decrease the federal deficit and debt, a reality that accounting tricks may disguise but can’t eliminate.

The Congressional Budget Office in March issued a report on America’s long-term fiscal situation. 

If current laws remained generally unchanged, the 2017 tax cuts would expire at the end of this year, and discretionary spending would shrink as a share of gross domestic product. 

Under that scenario, the annual budget deficit in 2035 would remain roughly in line with where it now stands (about 6% of GDP), and we would add more than $20 trillion to publicly held government debt between 2025 and 2035, raising debt as a share of GDP from 100% to a record 118%.

The bill that came before the Budget Committee on Friday would have made matters even worse. 

In a report issued before the meeting, the nonpartisan Committee for a Responsible Federal Budget estimated that the bill would have increased the national debt by $3.3 trillion more than the CBO’s baseline projection for the next decade, and the projected debt-to-GDP ratio would rise from the baseline 118% to 125%. 

Worse still, if all the gimmicky “temporary” measures in this bill were subsequently made permanent, as often happens, the national debt would rise to $5.2 trillion above the baseline projection, and the debt-to-GDP ratio would surge to 129%.

This was the context in which Moody’s downgraded the United States’ sovereign credit rating on Friday, citing the government’s persistent failure to adopt measures that would “reverse the trend of large annual fiscal deficits and growing interest costs.”

This is more than a green-eyeshade accounting exercise, as the CBO report makes clear. 

If we don’t change course, borrowing costs will likely rise, slowing private investment and imposing economic costs; interest payments to foreign debt-holders will expand, decreasing domestic income; pressure on the federal budget will intensify as debt service costs surge; and confidence in the dollar will fall as the risk of a fiscal crisis rises.

Let’s be clear about what changing course means. 

As the U.S. population continues to age, the costs of Social Security and Medicare as a share of GDP will mount inexorably. 

Together, these two programs will account for more than 100% of the increase in federal spending as a share of GDP over the next decade. 

It’s doubtful that the American people will accept significant cuts in these programs, which have become the cornerstones of a secure and dignified retirement.

These demographic and political realities point to the same conclusion: that increased revenue will be needed to secure these programs for the long term. 

Americans may be reluctant to see their taxes go up, but they will be even less willing to see their Social Security and Medicare benefits go down.

According to the most recent report of the Social Security and Medicare actuaries, the Social Security system faces a long-term shortfall equal to 3.5% of the taxable payroll that provides the program’s revenues. 

By 2033 the system’s reserves will be depleted, and it will be able to pay out only 79% of promised benefits.

The current Social Security payroll tax rate is 12.4%, split evenly between employers and employees, so stabilizing the program solely with increased revenues would require the equivalent of a rate of 15.9% on the currently taxable payroll, a rate increase of 28%. 

If the amount of payroll subject to the tax were increased, a smaller tax rate hike would suffice, as it would if Americans were willing to accept modest benefit cuts.

Unless the actuaries are too pessimistic, the next president will be forced to address this issue, and so will a Congress that by and large has forgotten how to legislate across party lines. 

The necessary changes would be easier to bear if they could be phased in before the crisis hits, but past performance suggests that the government will act only when it can postpone difficult choices no longer.