The Committee for a Responsible Federal Budget recently released an analysis of the major presidential candidates’ campaign promises and their net costs.
Vice President Kamala Harris’ campaign hopes to extend tax cuts for those making under $400,000 per year, have Medicare cover home care for the elderly and help with down payments for first-time homebuyers, among many other items.
The debt price tag on all that?
“Vice President Harris would add about $3.5 trillion to the debt” over 10 years, said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget. “And that’s inclusive of their pay-fors and their tax increases.”
Former President Donald Trump has promised to extend tax cuts up and down the income spectrum, lower the corporate income tax and increase defense spending, to name a few items. Price tag there?
“President Trump on net would add about $7.5 trillion to the debt,” Goldwein said.
The CRFB actually imagined several different worlds where things go better or worse for the federal budget. “In that range, we found that Vice President Harris could be anywhere from deficit-neutral to $8 trillion in the hole, whereas President Trump can be anywhere from $1.5 trillion to $15 trillion in the hole,” he said.
We reached out to both campaigns. The Harris campaign sharply disagreed with the analysis and said its candidate would reduce deficits. The Trump campaign didn’t respond to a request for comment but in speeches, the former president has claimed the same. There are models that suggest Harris, if elected, could reduce or freeze deficits, but no major independent models that suggest Trump might.
Harris would raise revenue through increasing the corporate tax rate, for example. Trump has pointed to tariffs as a way to raise money.
“Now we’ve included the most revenue you can get from those,” said Erica York, senior economist at the Tax Foundation. “That doesn’t even offset the full cost of making the 2017 tax cuts permanent, and Trump has identified several more tax cuts on top of that that he would like to pursue.”
Nor do tax cuts typically pay for themselves, she said. Gabriel Chodorow-Reich, professor of economics at Harvard University, along with several colleagues analyzed the 2017 Tax Cuts and Jobs Act, passed under Trump.
“We find that there was a benefit to the aggregate economy in terms of growth. It comes to an additional increase in the economic growth rate of a little bit less than 0.1 percentage points per year over the first 10 years. So there, but not huge,” Chodorow-Reich said. “As a result, the tax revenue increases from higher growth are not large enough to offset the large decline in tax revenue that comes from the fact that it was a tax cut.”
Neither party seems particularly concerned with deficits, but they should be, said Kimberly Clausing, professor of tax law at the University of California, Los Angeles.
“We’re in a booming economy. We’ve been lucky in a lot of ways, but you never know when the next recession is coming. You never know what national security threats the U.S. might be subject to, so if you’re already maxing out the credit card, then when something bad happens, you’re not ready,” Clausing said.
More immediately, interest on debt is eating up more and more of the budget.
“The government’s shelling out more on interest than they are on defense budget for the first time in history,” said Mark Zandi, chief economist at Moody’s.
Deficits can also eventually start to pull levers in the economy that end up limiting economic growth.
“Higher deficits and debt become a problem when they lead to higher interest rates,” Zandi said.
Sudden deficit expansion can spur inflation, which can force the Federal Reserve to raise interest rates.
“If you do a big surge in deficit spending, essentially you’re putting more money into the economy, but you’re not putting more stuff into the economy. And so people have more money, but there’s not more production. The prices have to go up,” Goldwein said. “It’s more money chasing the same amount of goods.”
The Federal Reserve may have to raise interest rates, “but then, instead of inflation, what you have is a higher mortgage rate and a higher rate on your car loan and higher rates for businesses, and that’s when it flows into economic growth,” Goldwein said.
That scenario depends on how much slack there is in the economy to begin with, Chodorow-Reich said, recalling some recent economic history.
“A big surge in deficit spending in 2009 is not inflationary because the unemployment rate is high, and the economy has the capacity to increase production,” Chodorow-Reich said. “A big surge in 2021 is somewhat inflationary because the economy is already operating close to capacity. The 20-teens are somewhere in the middle.”
Deficits may raise interest rates in another, more perilous way. As the government issues more and more bonds to pay for expanded spending, it may need to pay higher rates to convince markets to absorb them.
“And you can get into a situation if there’s so much debt, if there’s a lot of bonds out there that need to be purchased, those people that are buying it begin to say, ‘Hey look, there’s so much debt out there, are you going to be able to pay me back?'” Zandi said. “They begin to question it, and they say, ‘You gotta pay me a higher rate of interest to compensate for the risk that you might not.’”
In other countries, that’s led to a spiral in which the debt gets so big investors don’t want to lend. So rates go up, in turn making the debt even bigger and more unsustainable, and investors are even less willing to lend.
This is called a debt crisis. And Zandi said a crisis is what it may take to get politicians to take deficits more seriously.
