Democrats may also be constrained by the lack of fiscal wiggle room. It could mean their spending programs—health-care for all, universal preschool and free college—would need to be offset by large tax hikes, something that has caused moderate party members to balk.
Progressives in California have seized on the current economic conditions to try tax-hike ideas that have failed to gain traction at the federal level. Voters there will decide next month on a new surtax on millionaires to fund wildfire prevention and electric vehicles. A surtax is also on the ballot in Massachusetts.
In Washington, Republicans haven’t held enough power to try tax cuts recently. But they’ve remained popular at the state level, with Utah, Georgia and Indiana among those that have cut income-tax rates this year.
With a larger economy and the world’s reserve currency, the U.S. doesn’t face as much risk from lowering taxes, said Kimberly Clausing, who until May was a top official in President Joe Biden’s Treasury Department.
“There’s more leeway for us to do things that are financially irresponsible without the consequences coming home to roost as quickly,” said Clausing, now a professor at UCLA. “But Congress is known for being somewhat provincial and focusing a lot on the American perspective and ignoring the likely market reaction.”
Unfunded major tax-cut packages have become commonplace in Washington in recent decades, a trend started by President George W. Bush in 2001 and 2003. President Barack Obama ended up making many of those tax cuts permanent a decade later—the price for winning approval for some of his own agenda items.
Trump followed with his $1.5 trillion 2017 tax cut. If history is any guide, those rate cuts and reductions for small businesses, which are set to expire at the end of 2025, will be made permanent no matter which party controls Washington.
Congress has lowered tax rates without working to balance those reductions by eliminating the scores of small, but collectively expensive, deductions and credits for specific groups, Doug Holtz-Eakin, a former director of the Congressional Budget Office, highlighted.
“The missing piece of this has always been broadening the base—get rid of the special treatments and loopholes,” said Holtz-Eakin, who now is the president of the American Action Forum.
Members of both parties aren’t used to having to take deficits and and interest rates seriously, because they haven’t been a problem in recent decades, the Manhattan Institute’s Riedl said.
“We’ve gotten the idea that fiscal crises are impossible and that debt limits don’t matter,” said Marc Goldwein, a senior vice president for the Committee for a Responsible Federal Budget. “The U.K. is a wakeup call that this simply isn’t true.”
This article was provided by Bloomberg News.