Proponents of supply-side economics argue that tax cuts spur economic growth, which translates to increased government revenue. They say this ultimately helps to reduce budget deficits. Critics counter that in practice, the concept rarely delivers its advertised benefits.
The report this week that the U.S. federal debt passed the $40 trillion mark has garnered significant press coverage. As I read and listened to some of the commentary, the supply-side theory came to mind. It was the basis of President Trump’s 2017 Tax Cuts and Jobs Act (TCJA) that, among other provisions, permanently lowered the top corporate tax rate from 35% to 21%.
In 2017, the national debt was around $20 trillion. It is quite astonishing for a single nation, even one with an economy as large as America’s, to accumulate an additional $20 trillion of debt in less than a decade. Some of the new debt is indeed related to pandemic-era stimulus spending, but some economists and politicians blame the TCJA for contributing to wider budget deficits and hence the growing debt.
As things stand, it appears the detractors of the supply-side theory are winning the argument. The Congressional Budget Office (CBO) currently projects a federal budget deficit of $2.1 trillion (over 6% of GDP) for fiscal year 2026. The CBO also expects the deficit to increase to $3.1 trillion in 2036 (in essence, deficits as far as the eye can see).
Given these deeply troubling forecasts, it is fair to ask: When will the supply-siders show us the money? They will probably say that wealthy individuals and corporations already pay significant amounts of taxes on their incomes. They will likely point to Tax Foundation data showing that for Tax Year 2023, the most recent year for which data are available, the top 1% accounted for 38.4% of federal income tax revenue, while the bottom 50% paid only 3.3% of the total. And they will almost surely argue that the problem is not insufficient revenue, but rather excessive spending.
I have heard former Treasury Secretary Hank Paulson say a few times that to make a dent in that huge pile of debt, the U.S. will need a combination of additional revenues (from tax increases) and spending cuts. People on the right like to focus on cutting government spending, while the left insists on increased taxation. Mr. Paulson was the head of Goldman Sachs before entering public service. He therefore knows a thing or two about wealth and taxes, and the need for expense reductions. His authoritative voice is one that we would be wise to heed.
One notable concern is that when people on the left call for tax increases on wealthy individuals and corporations, it doesn’t appear as though they necessarily want those revenues to go toward deficit and debt reduction. Their focus seems to be expenditure on new and existing social programs. This country needs the parties on both sides of the ideological spectrum to treat the national debt problem with the urgency it requires.
The AI companies’ intense hunger for cash today is compounding the national debt problem. There is evidence that their massive borrowing is starting to put upward pressure on long-term bond yields. Interest payments on the national debt have already surpassed $1 trillion a year. If the recent increased volatility in the bond markets is an indication of what lies ahead, we could be in for a rough ride. I have heard at least a couple of commentators say in recent days that on the current trajectory, $50 trillion in debt may not be too far away.
Lord have mercy on us.