Congressional Republicans are on the cusp of achieving their biggest goal: Passing a tax reform bill. While the bill itself is, in no way, tax “reform”, it does offer tax cuts for certain individuals and businesses. This has been the dream of Republicans in both the House and Senate for years, and it’s an issue on which they’ve used to separate themselves from Democrats who they claim to want higher taxes and bigger government.
But they’ve finally done it. Almost a year into the Trump administration’s first (and possibly only) term in office, Republicans in both the House and Senate have managed to pass tax reform bills through their respective chambers. Both bills passed without a single Democratic vote, and even with some Republican dissent. But they’ve made it passed the finish line, and are now banging out the details in order to get something on President Trump‘s desk for signing.
The big issue, though, is that the tax cuts contained within create a huge deficit in the federal budget. This, you may remember, was a big and contentious topic among conservative Republicans during the Obama years. In this case, however, it seems that many conservatives are willing to overlook or set aside those concerns. The argument is that the economic growth spurred by the passage of a tax reform bill will, in turn, boost tax revenues. Thus, offsetting any potential losses.
But if that doesn’t come to pass, what are we to do? Paul Ryan, the Republican Speaker of the House, has already spilled the beans: They’re going to start carving up entitlements and social programs. What do they plan to cut, and who will it affect? We’ll get into all of it, but first, a brief overview of the bill.
First: A look at what the tax bill does, who it helps, and who it hurts.
The Republican tax reform bill*
- In a nutshell: Lower corporate rates, and a lower top individual rate.
Be warned: This is a big tax bill, and it has a lot of moving parts. There are tons of things included — far too much to discuss here — so we’ll give you the gist of it. The most consequential thing the bill does is lower the corporate tax rate from 35% to 21%. This is what creates most of the resulting deficit (which we’ll discuss next). The other headline item is that the top individual tax rate — the highest marginal rate paid by the country’s highest earners — drops from 39% to 37%. There’s also the repeal of Obamacare’s individual mandate (a whole other ball of wax), a rise in the threshold for the estate tax, and several other goodies.
*In its current form — things can change.
Next: A look at the CBO’s take on the resulting budget deficit.
The results: A $1.45 trillion deficit
- According to the Congressional Budget Office, the bill will create a $1.45 trillion shortfall.
What happens when you cut a bunch of revenue or income and don’t decrease spending? You end up with a deficit — something abhorred by most members of the Republican Party until recently. In the case of this particular bill’s passage, the CBO estimates a $1.446 trillion deficit will be created. That’s lower than earlier versions of the plan, which created deficit estimates as high as $4.5 trillion. The question, of course, is how they plan on squaring the circle when it comes to that deficit.
Next: The plan to help offset the deficit.
Fixing the deficit: Attacking entitlements
- Entitlement, or human services spending, eats up 73% of the federal budget, according to Pew Research Center.
As mentioned, Paul Ryan has more or less already said how Republicans plan to tackle the deficit: They’re going to cut entitlements. “Entitlements” refers to a number of social programs, including but not limited to Social Security, Medicare, and Medicaid. Spending on these programs does eat up a huge portion of the federal budget, and if they’re not reformed at some point, they’ll devour the entire budget. So, in theory, this isn’t a terrible idea.
The problem is that they’re choosing to cut spending on these social programs in order to cut taxes for top earners and corporations. That is what isn’t sitting well with the majority of Americans.
Next: Social Security cuts.
- President Trump promised not to touch Social Security. But he suddenly seems willing to.
Spending on Social Security accounts for about one-quarter (24%) of the federal budget. It’s a monster expense, but it’s a program that tens of millions of people rely upon to get through their golden years. Not only that, but they’ve all paid into it — and they’re expecting something in return. This is also what has a lot of people scared. Trump, famously, promised not to touch the program. But recent reports indicate that he will be willing to go after it “at the beginning of his second term”. You know, when he doesn’t have to win any more votes.
Next: Medicare cuts?
- Spending on Medicare swallows up about 15% of the federal budget every year.
Another monster expenditure, Medicare is the universal health care system for senior citizens. And no, paying for health care for an elderly population isn’t cheap. But this is a program which many Republicans feel is ripe for cutting. If it were privatized (or parts of it, anyway), many feel it could end up costing less and being more efficient. They may be right, but the thought of shaking up a system that tens of millions of people rely upon for health care can be scary.
Next: What about Medicaid?
- Medicaid covers more than 69 million Americans, and costs around $350 billion per year.
Yet another giant federal program that could find itself in the sights of Paul Ryan and his ilk? Medicaid, which is a health care program designed to cover low-income individuals. But because it’s so expensive, it’s also primed for cutbacks. The program consumes around 10% of the federal budget every year, and yes, could probably be re-optimized in some way to help lower costs. Again, though, most people probably don’t think that paring it down in order to cut taxes for Apple is the correct course of action.
Finally: What does it all add up to?
- What will happen if Republicans actually do take aim at entitlement programs? It’s hard to say.
Let’s say everything goes according to plan for Paul Ryan, Trump, and Senate Majority Leader Mitch McConnell. They pass their tax plan, and then slice and dice through entitlement programs to make the math work. What happens then? The simple answer is that we don’t know. Tens of millions of people will be affected, of course, and they’ll mostly fall into two groups: The elderly, and the poor. We’ll have to wait and see what eventually comes of the tax bill and resulting deficit, but if we follow the path to its logical end, a lot of people could end up in a bad situation.
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