The latest economic report foreshadowing the negative impact of President Donald Trump’s tariffs is giving congressional Republicans renewed impetus to move quickly on their “big, beautiful” tax cut bill. But if they do not offset the impact of the bill on the federal deficit, they risk making inflation worse and exacerbating price hikes. Voters, and the economy, might never forgive them.
By some accounts, the Republican plan could increase the national debt by more than $5.8 trillion over the next decade. Justifying a massive, deficit-financed tax cut bill under the guise of stimulating the economy is the same rationale that Democrats used to pass the $1.9 trillion American Rescue Plan Act in 2021. This was a fiscal overreach that caused inflation to soar and Democrats’ political fortunes to crash and burn. Unless Republicans do more to offset the deficit impact of their tax plan, they risk making the same mistake.
Many Democratic lawmakers knew the economic and political risk they were taking. They had been warned by former Treasury Secretary Larry Summers and others. But they feared crossing then-President Joe Biden and party leadership more than the economic consequences.
To be sure, economic growth is a key to improving America’s fiscal situation. And in this respect, the Republican tax cut plan differs from the massive cash handouts enacted in the ARPA — it contains many pro-growth elements. But not every tax cut is pro-growth.
The ARPA included $1,400 direct checks for every adult, an expanded Child Tax Credit up to $3,600 from $2,000, and enhanced unemployment insurance payments with an exemption from tax on the first $10,200 of UI benefits. Some provisions in the Republican tax bill also look a lot like transfer programs run through the IRS, such as extending the $2,000 child tax credit, which some Republicans want to increase to $4,200, along with exempting taxes on tips, overtime, and Social Security. Whatever their merits, these provisions of the ARPA and the Republican tax plan are not pro-growth.
Meanwhile, another contingent of Republicans is pushing to raise the $10,000 cap on state and local taxes, which would deliver a huge windfall to high-income taxpayers. According to the University of Pennsylvania Wharton School Budget Model, these provisions would combine to add trillions to the deficit. Yet, their impact on the economy is closer to a Keynesian demand-side stimulus, which would almost certainly be inflationary.
Of course, in contrast to the ARPA, the Republican tax plan does contain some pro-growth provisions, such as improved expensing for business capital investments and a faster write-off for research and development expenses. When Tax Foundation economists modeled the economic effects of making the Tax Cuts and Jobs Act permanent, they found that the business provisions would grow the economy by 0.7% over the next decade, while the individual provisions would boost GDP by just 0.4%. Just as importantly, the business provisions, a mere fraction of the overall cost of the bill, would do more to raise wages than the individual provisions.
Here is the rub for Republican lawmakers: Despite the pro-growth nature of many elements of their tax plan, it will not “pay for itself,” as many are quick to claim. The Tax Foundation’s General Equilibrium Model estimates that the conventional cost of extending the TCJA would be $4.5 trillion over a decade. After adjusting for the economic effects, the cost drops by only 16% to $3.8 trillion — and that is before adding interest costs, if the plan is not paid for.
The Penn Wharton Budget Model shows even less economic feedback, just 4%. It projects a $4 trillion conventional cost of extending the TCJA, but $3.83 trillion assuming the growth effects.
The bottom line is that under no scenario does either model find that the tax cuts pay for themselves, nor do they produce enough economic growth to offset the harm caused by Trump’s tariff plans. The Tax Foundation estimates that the tariffs would lower GDP by 0.8% over a decade, while Penn Wharton estimates the tariffs will lower GDP by 1%, assuming that consumers and businesses share the costs.
The budget plan passed by the House and Senate does call for $2 trillion worth of spending and tax offsets over a decade. That is a good start, but it still falls far short of the more than $5.3 trillion worth of tax cuts the plan allows for.
THE FISCAL IRRESPONSIBILITY OF MODERATE REPUBLICANS
There is no shortage of savings options available to lawmakers to offset the full budgetary cost of the tax plan. Arnold Ventures recently released a plan with 20 sensible options that would wring the waste out of healthcare and student loan programs while closing harmful tax loopholes. Together, these options would deliver $4 trillion in savings that would cover much of the cost of making the tax plan permanent.
Republicans must get serious about offsetting the budget cost of their tax plan, or they risk enacting their own version of the ARPA, thereby fueling more inflation and raising the national debt.
Scott Hodge is a tax and fiscal policy fellow at Arnold Ventures and president emeritus of the Tax Foundation.