The U.S. federal budget seems out of control. Funding spats and debt-ceiling standoffs routinely threaten to force defaults and shutdowns. America’s once-unassailable credit rating keeps slipping. Has the government simply become too big to manage?
No, but it has been so poorly managed that one could be forgiven for reaching that conclusion. Congress must do better, and next year it will have a rare opportunity.
In 2017, Congress passed a law commonly known as the Tax Cuts and Jobs Act. Its authors sold it as a fiscal miracle drug: It would simplify taxes, make businesses more competitive, increase wages, create better jobs, boost economic growth and raise revenue. Now the evidence is in, and the TCJA looks set to be remembered as an outstanding fiscal disaster. By 2027, it will have cost almost $2 trillion, while failing to deliver the promised benefits.
Economists typically expect a tax cut to have the greatest impact in its first year. In 2019, the Congressional Research Service, charged with briefing Congress on its own policies, concluded that the TCJA didn’t increase wages and had little to no effect on economic growth. Researchers at the International Monetary Fund reached a similar conclusion about private investment. Companies themselves reported they didn’t use the tax cut to invest, hire or give raises.
It’s hard to see how policy makers could have expected anything different, given the history of tax cuts. Similar initiatives in 2001 and 2003 didn’t strengthen the economy or pay for themselves, either. Instead, they primarily benefited the wealthiest households, while sharply increasing federal deficits and debt. Regular Americans appear to understand this: They mostly didn’t support the TCJA, even as it was being passed.
The mismanagement becomes all the more galling when one considers how the money could have been spent. Two trillion dollars over 10 years isn’t chump change. The 2021 expansion of the Child Tax Credit, which temporarily lifted almost 3 million children out of poverty, would have cost $1.6 trillion to extend for 10 years — an expense that lawmakers considered too great. And that would still leave $400 billion, enough to provide universal child care and two years of free preschool to all interested US families.
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Children are an excellent (and proven) investment, providing returns to the government and the economy in the form of a better-educated populace, greater labor force participation, higher productivity and fewer demands on the social safety net. Give kids a healthy, supported start and they give back their whole lives. Most people would readily choose such a high-return opportunity over a money-losing tax cut. Not Congress.
Maybe you just wish the U.S. would tackle its debt. OK, the government owes $2.8 trillion to its own people, via Treasury securities held in the Social Security trust fund (which, by the way, is on track to be depleted in about a decade). So the 2017 tax cut squandered about two thirds of that amount — resources that could have been used to fulfill promises long made to American workers.
Next year, Congress must decide whether to extend many of the TCJA’s provisions, which were designed to expire to make the tax cut’s cost appear less burdensome. One would hope they’d at least walk away from a law with a terrible track record, if not take the opportunity to make improvements based on the lessons learned.
Nothing but willful blindness renders the U.S. incapable of having a functioning and sustainable budget.
Kathryn Anne Edwards is a labor economist and independent policy consultant. ©2024 Bloomberg. Distributed by Tribune Content Agency.
