Is it possible the Big Beautiful Bill could actually shrink our government’s debt – that instead of adding to trillion-dollar deficits, it might in fact reduce our nation’s budget gaps?
That is certainly an outlier expectation, but Larry Kudlow and others are looking at numbers far more favorable than those projected by the Congressional Budget Office. They point out that the CBO has been wildly wrong time after time, and yet critics of the bill (and of President Trump) numbly repeat the CBO’s estimate that the BBB will cut taxes by $3.7 trillion while raising deficits by $2.4 trillion over a decade as though it’s one of the Ten Commandments.
The CBO has been especially wrong about how tax cuts generate growth, and how that growth delivers revenues, benefiting our nation’s income. The 2017 Tax and Jobs Act, for instance, was estimated to reduce tax revenues; instead, income from taxes soared. As Kudlow said on his Fox Business show the other night, “The current cost of the 2017 tax cuts should be zero. Why should they be zero? Because they actually produced more revenues, $2.3 trillion more revenues than CBO estimated over the past seven years.”
In other words, if you take current tax policy as the baseline, which seems appropriate since mostly the BBB is extending rules now in place, there is zero impact from keeping rates on corporations and individuals at today’s levels. Of course there are add-ons for additional tax cuts, like eliminating taxes on tips.
Building on that premise is essential, as is factoring in the impact of growth on the numbers. For instance, if you assume that lower taxes and some additional features like immediate expensing of investments in equipment attract more investment and kick-start U.S. growth to 3%, the benefit is a $4 trillion tax windfall over 10 years. (The CBO assumes growth of 1.8%; the low number is typical since they historically underestimate how lower taxes spur investment, productivity and growth.)
If you add in the expected savings to mandatory spending in the House bill, which changes eligibility requirements for Medicaid and is predicted to lower outlays by $1.7 trillion, and also factor in CBO-estimated tariff income of $2.8 trillion over the next decade, you’ll find the BBB reducing federal deficits by $8.5 trillion – not blowing them up by $2.4 trillion.
That’s quite a swing. Even if growth doesn’t reach 3%, and comes in at only 2.5%, you still get lower deficits – not the pile-up of new debt the CBO is promising. Considering the enormous productivity gains we may see from AI, growth above 1.78% seems well within reach.
The CBO appears to be mostly staffed by Democrats who don’t appear to believe in growing the economy; their party never prioritizes that ambition. It’s not surprising – especially given their animosity towards President Trump — that they would take a dour view of his principal legislation. People should know – there is another calculus.
They also should know that a reconciliation bill like the BBB can only deal with mandatory spending and taxes. Hopefully the GOP Congress will deliver more spending cuts, focused on discretionary spending, in appropriation bills yet to come. The American people voted against Joe Biden’s gigantic spendathon – surely the Republicans can do better. I think they will.
