What the New Tax Cuts Mean For National Debt and American Households

What the New Tax Cuts Mean For National Debt and American Households

On November 2nd, 2017, we saw the details of the highly anticipated tax plan being released. Given the magnitude of this plan, it is safe to forecast a huge change in the way Americans pay taxes. Since a large proportion of citizens voted for the opposite to what has been presented, let’s look at how this change will affect American households and the country’s national debt.

New Cuts – What to Expect?

The new tax plan looks to cut tax rates and also cut contributions in a number of vital areas including medical programs such as Medicare. Another program being scrapped is local deductions and student loan deductions, while corporate tax sees a 15 percent reduction. With all these changes, what does this mean for our national debt? Well according to calculations, the revamped tax plan will actually add $150 billion a year in national debt. In other words, the fiscal deficit wouldn’t be decreasing but increasing.

However, there are no plans to increase revenues elsewhere or by any other means. Ultimately this leads to reduced national revenue and increased national debt. In a decade, this would easily place national debt at its highest since World War II. Considering America’s current debt of $20 trillion and $12.7 trillion in consumer debt, it’d be safe to say things aren’t looking very good.

However, it has to be said that America isn’t the only country facing such a predicament. A great number of European nations are also dealing with a challenging economic situation, not to mention some of the most indebted African countries, like Uganda and Namibia.

As a percentage of America’s GDP, we now owe more than the country generates annually. By cutting taxes garnered from citizens and corporations, the government will see a federal deficit.Trump’s administration argues that this increase is necessary to achieve the aggressive growth he laid out, most notably the 6 percent annual growth in the American economy. So how does the administration plan to pay for this?

Paying for the Deficit

Using the cut in reductions they claim. With the value of the tax cuts being estimated at $5.8 trillion over ten years, Republicans claim that by removing the above-mentioned tax benefits mostly personal tax deductions they will be able to make up for this shortfall in tax income. However, based on estimates this still leaves the country over $2 trillion short. Another way the administration has claimed that it will pay for the cut in federal revenues is by stimulating economic growth. However, using demand theory businesses will not produce more products unless there is demand for it.

This means that the American government will have to borrow money as it did after the Bush administration tax cuts. For the economy, this means national debt will exceed $30 trillion by 2027 should the unpaid for tax cuts go ahead.

Effect on households

For consumers, removed deductions and less public help with programs such as Medicare will leave families with no choice but to pay out of pocket for medical bills. First time homeowners will also see their mortgage interest deductibles drop to $500,000, limiting homeowners purchases, should the bill pass.

For larger cities such as New York, middle class individuals will be highly affected since house prices exceed $500,000.On a positive note, lower income Americans which is approximately one third of the population will pay no taxes and child care benefits will increase for families.

In the long run, we can expect an increase in both consumer debt and national debt. With increased national debt, comes increased interest payments which will now account for a large portion of the federal budget over the next ten years. If anything, it would seem that the benefits of Trump’s tax reform would increasingly be seen as the wealth bracket goes up. Considering the progressive tax system and the fact that the top one percent of Americans contribute the larger part of taxes, we are now left to wonder who will pay for it all. It seems Trump’s campaign promises of reducing the national debt is going in the opposite direction.

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