Deficit History & Tax Cuts – Fiscal Policy

  January 5, 2018

The passage of the Tax Cuts & Jobs Act has prompted a flurry of analysis and criticism surrounding the affects on the Federal deficit due to lower tax revenue. Critics claim that the loss of tax revenue due to tax cuts will eventually lead to an increase in the Federal deficit unless economic growth is achieved.

The affect on individuals should the deficit grow is that the cost to borrow for the U.S. government would go up, thus leading to an increase in interest rates for consumers. So as the shortfall in receipts rises it also becomes more expensive for the government to carry debt (interest payments) because rates have risen.

Historically, rising deficit levels have brought about inflation as the Federal government issues more debt to sustain it’s spending abilities following tax revenue losses.

Deficits can get larger from fiscal policy reform, such as tax cuts or government spending increases, and also increase during poor economic periods. The federal deficit grew very quickly following the financial crisis of 2008-2009 as tax revenue fell sharply. Conversely, prior deficits have also shrunk as economic growth has led to tax revenue increases.

Sources: GAO, Federal Reserve; fred.stlouisfed.org/series/FYFSD

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