One of the criticisms of the currently proposed GOP Tax Cut bill is that it will reduce tax revenue and so increase the national debt. As a friend put it recently, “I’m against this bill because it will place an unfair burden on my grandchildren.”
(Let’s put side the observation that, if anyone was really worried about the national debt they should have said something nine years –and 10 trillion dollars in debt– ago.)
But the fact is that debt arising from tax cuts is very different from debt arising from government spending. And a close observation shows that the proposed tax bill will not increase the burden on future generations.
Tax Cuts and Debt: It’s a Wash
While the actual increase in debt resulting from the tax bill a matter of debate, let’s for the sake of argument use the often-bandied figure of a $1.5 trillion increase in debt. While this certainly seems like a substantial number, keep in mind that the $1.5 trillion will not just disappear – it will remain in the pockets of US taxpayers, who will be paying lower taxes, and will increase their wealth accordingly. So any increase in the national debt will, by definition, be offset by an equal increase in private wealth created by the tax cuts themselves.
To get back to my friend’s argument, the taxpayer will not be burdening his grandchildren, because the $1.5 trillion government debt burden will be offset by $1.5 trillion in increased private savings and wealth. It’s a wash.
But Debt from Government Deficits is Different
So while any deficit from the tax cut will be offset by tax savings to citizens, the deficits arising from excess government spending are very different. The Obama era saw a huge increase in government spending that added an incremental $10 trillion in government debt. That $10 trillion in debt truly is a burden to future generations, as there is no offsetting wealth granted to the taxpayers.
Who is the best fiduciary?
Now to be fair one might argue that deficit spending can provide a benefit – after all, government spending is not necessarily 100% wasteful. That $10 trillion might have gone into infrastructure, or defense, or other needed allocations that could benefit future generations. However it’s also very possible that much of this was wasted, spent on needless regulations, or salary increases for government workers who turn around and plow it back into blowing up the Washington DC housing bubble.
But the $10 trillion is definitely a burden to future taxpayers, and there is no offsetting increase in personal wealth accruing to citizens. So the only benefit is the residual value of that $10 trillion in government spending – if you can figure out where it went.
So perhaps the real question should be: Who is the best fiduciary for that $1.5 trillion? The Federal Government? Or your own bank account? I’ll leave you to decide…