Will Trump's Tax Cuts Be Followed by Tax Hikes? Like George H W Bush?

This article first appeared on the American Enterprise Institute site.

So what's next on the GOP tax agenda after President Trump signs the $1.5 trillion tax cut? The flip answer: another tax cut.

These are Republicans, after all. Cutting taxes is what they do.

But I am not sure the next steps are so obvious, especially given the likely sharp increase in the federal debt-GDP ratio over the coming years. (This assumes we don't get a replay of the 1990s productivity and growth boom, and we might.)

It's hard to imagine another big deficit-financed tax cut happening anytime soon, especially as annual deficits enter trillion-dollar territory. Indeed, the next big battle might be keeping all these tax cuts in place if Democrats take control of Washington.

So a replay of the battle over the Bush #43 tax cuts.

US President George H W Bush after his address to the nation, 27 September 1991, in the Oval Office of the White House. LUKE FRAZZA/AFP/Getty

But who knows? If Republicans are able to reform welfare/entitlements and greatly reduce long-term projected deficits, maybe they will use some of those savings for more tax cuts.

Maybe Republicans would want to make permanent the immediate expensing of capital investments or reduce payroll taxes on workers in the age of rising automation. (Yes, I realize there is a tension between those two ideas.)

Recently, economist Barry Eichengreen suggested giving "companies tax credits for the cost of providing lifelong learning to their employees."

Keep in mind, however, that for Democrats to go along with spending cuts — to make the math work, really — there will have to be tax hikes. (Also, where are Dems on entitlement reform these days?) As my AEI colleague Michael Strain recently wrote:

Take Medicare. To keep Medicare spending from exceeding its current level would eventually require cutting projected Medicare spending in half. It is politically unlikely that this will occur.

So while the debt should be primarily addressed by spending cuts to Medicare and Social Security, some new revenue will probably be needed. How to generate that new revenue?

I wouldn't increase individual income or corporate tax rates. So perhaps a carbon tax, coupled with eliminating inefficient environmental regulations? Perhaps a federal consumption tax ?

This debate needs to be had, and conservatives should be ready to come to the table.

Those revenue-increasing options look like a heavy lift, obviously. (And I would guess Democrats might also want higher top rates on labor and capital income.)

Then again, so did alternatives like significantly modifying tax expenditures, as the recent battles over the mortgage interest deduction and state and local tax deduction suggest. I guess we will eventually find out if Washington cares about debt without a nudge from the markets.

Maybe the next steps are smaller ideas, such as expanding the Earned Income Tax Credit or targeted tax breaks for left-behind communities.

But if you are looking for radical tax reform, it may be more about taxes going up rather than down.

James Pethokoukis is a columnist at the American Enterprise Institute.

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