Permanently Extending the Trump Tax Cuts Would Increase Upward Pressure on the Debt Ratio by More Than 50 Percent

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from American Progress,

If Congress renews the Trump tax package, the fiscal gap will grow from 2.1 percent of GDP to 3.3 percent of GDP, making debt ratio stabilization 54 percent harder.

Each year, the Congressional Budget Office (CBO) releases a long-term projection of the budget outlook. These projections of the primary (or noninterest) deficit when measured as a percentage of gross domestic product (GDP) have declined each year of the Biden administration. The CBO nonetheless projects that those primary deficits will remain high enough to lead to debt that rises indefinitely as a percentage of GDP. This long-term growth in the debt ratio is due entirely to the Bush tax cuts and their bipartisan extension. Under current projections, stabilizing the debt would require the primary deficit to be, on average, 2.1 percentage points of GDP lower each year for the next 30 years.

At the end of 2025, large portions of the Trump tax cuts are set to expire. These cuts disproportionately reduce taxes for rich households and wealthy heirs. If Congress were to permanently extend the expiring provisions, that would significantly increase the projected primary deficit and thus increase the upward pressure on the debt ratio by more than 50 percent.

The fiscal gap measures the average amount of primary deficit reduction required to ensure the debt ratio at the end of any specified budget window is no larger than it was at the beginning of that budget window. Using the CBO’s most recent projection, from March 2024, the fiscal gap is 2.1 percent of GDP.* In other words, primary deficits would have to be reduced by an average of 2.1 percentage points of GDP each year over the next 30 years for net debt in 2054 to equal its current level as a percentage of GDP.**

The fiscal gap can be thought of as the upward pressure on the ratio of debt to GDP. This amount of upward pressure will lead debt net of financial assets to rise 80 percentage points of GDP over the next 30 years.

Permanently extending the Trump tax cuts would increase the fiscal gap to 3.3 percent of GDP—a 54 percent increase in the fiscal gap—leading to an additional increase of 36 percentage points of GDP in the debt ratio and pushing debt above 200 percent of GDP.*** In other words, permanently extending the Trump tax cuts would make stabilizing debt as a percentage of GDP 54 percent harder.

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