Written By: Nicholas Hughes
Politicians often propose laws with the intent of bettering the country. Some of these
proposals are taken seriously and revised into real bills that become law. Other proposals, while
made with good intentions, would be disastrous. In early March, Sen. Cory Booker (D-NJ) made
such a proposal, which would exempt the first $75,000 a household makes from facing federal
income taxes (NBC New York, 2026). The bill would also cost $5.3 trillion over the next ten
years according to the Yale Budget Lab (2026), making it one of the most expensive bills ever
passed. While positioned as a bill that helps the middle class, the bill actually benefits the highest
earners the most; those making around $75,000 only keep a few hundred dollars more, whereas a
household making $400,000 would keep nearly $10,000 more. This bill is indicative of a larger
pattern in recent U.S. politics where candidates have been proposing greater and greater tax cuts
for no reason other than to score short-term political gains. This continuous stream of tax cuts
has put us in a precarious situation as a country, and given the high debt environment we live in,
the U.S. needs to put its foot down and stop giving people broad, unfunded tax cuts.
To understand why we must stop giving tax cuts, we have to acknowledge the basic
realities of government revenues and spending. Each year, the government spends money,
primarily on entitlements such as Social Security, Medicare, and Medicaid, as well as defense
spending and debt payments (U.S. Treasury, 2026). During the year, the government takes on
debt to pay for these things with the intent of collecting enough revenue to cover their expenses.
However, in modern history, it has become common to run a deficit, where spending exceeds
revenue for the year. Running a deficit as a government is not as bad as it is for an individual
household, since governments have the ability to print money and take on debt to a far greater
extent, but it’s not an ideal strategy to rely on and can be hard to justify when the country is not
facing a crisis. When examining debt, it is important to look at either the debt or net interest
payments relative to GDP, as these measures quantify how capable we are to pay off the debt
relative to our means to do so. For these measures, debt-to-GDP as of recent is 122.9%, and
interest payments as a percent of GDP are 3.2%, both close to all-time highs (U.S. Treasury,
2026). While we have previously run deficits, the current moment is different due to the
persistence of high deficits during normal, non-wartime or crisis periods.
While these numbers sound really bad, does any of it really matter? Luckily, the effects
of government debt are a popular realm of study in economics. There are three main downsides
to large levels of national debt which are strongly supported by the economic literature. Firstly,
when governments reduce their revenue from taxes, they have to take on more debt. The
increased demand for loanable funds by the government puts upward pressure on interest rates,
making it harder for private citizens to make large household purchases and for businesses to
invest. This is known as “crowding out,” where government activity can sometimes prevent
private activities from happening. Crowding out is a well-documented phenomenon, and the
Congressional Budget Office estimates that for every dollar of deficit spending, investment
decreases between 15 to 50 cents (Huntley, 2014). Reduced investment leads to lower future
growth, stunting the potential of our economy and hurting our living standards in the long run.
When we further give people generous tax cuts, we force the government to take on even more
debt and increase crowding out further.
Secondly, unsustainable deficits make monetary policy significantly more complicated.
The Federal Reserve plays an important role in smoothing short-term economic performance. If
inflation starts to creep up, the Fed raises interest rates to cool spending. If unemployment begins
to rise, signaling weak job creation and growth, the Fed cuts rates. The Fed has a central role in the economy due to its insulation from politics and the speed with which it can affect economic
conditions. However, when governments take on more and more debt due to poor budgeting, rate
increases also raise the government’s debt-servicing costs and intensify fiscal strain. As a result,
the Fed’s job becomes significantly more complicated when debt is high: if it raises rates to fight
inflation, the government’s debt becomes more painful; if it hesitates to raise rates in the face of
inflation, pricing pressures may worsen. Large tax cuts increase the debt, creating greater
political and fiscal pressure on the Fed to tolerate higher inflation or avoid tightening rates. This
makes economic stabilization more difficult, as the economy becomes more vulnerable to shocks
and faces a bumpier path forward.
Lastly, by borrowing large sums in the present, we expose ourselves more to future risks.
As mentioned, large government deficits drive up interest rates charged on loans. In the future,
when we face crises such as a pandemic, a war, or a recession, the government will inevitably
need to borrow a large amount of money. Borrowing such a large amount at much higher interest
rates increases the risk of a fiscal crisis in the future. In these cases, the government may be
forced to cut spending or hike taxes during a downturn, exacerbating recessionary effects.
Worse, the government may choose to not respond to the crisis at all and bear its full brunt.
Thus, by running large deficits as a result of tax cuts today, we make it harder for ourselves to
run large deficits in the future when it may be necessary.
There are two common objections often used to justify broad tax cuts like those
proposed. One idea, which some might have already asked themselves, is if we could address the
other side of the budget equation by cutting spending. However, the numbers are simply too far
out of reach to fix by cutting spending, both politically and mathematically. Due to the spending
breakdown, we would have to completely scrap programs like Social Security and Medicare, or something similar. However, many of these programs have been responsible for large reductions
in elderly poverty and produced some of the greatest possible policy improvements in social
wellbeing, making them hard to cut (Engelhardt & Gruber, 2004; Finkelstein & McKnight,
2008). There exists room to reduce our spending on some individual line items, but these would
hardly cover the larger tax cuts like the ones proposed recently.
And lastly, there have been many famous and persuasive arguments made in the past that
deficit spending can be financed perfectly well, so long as growth outpaces the interest on the
debt (Blanchard, 2019). However, these arguments once again open the U.S. up to future
uncertainties: the U.S. would need to not only maintain its growth, but would need to begin
growing faster than it has previously in order to outpace the growing interest rates. Such a
demand would require the U.S. to grow faster long-term than any other country historically has,
and might be an impossible demand; as mentioned, this is a very uncertain outcome to rely on.
Thus, while growth-focused arguments are good historical descriptions of the state of the U.S.,
they may not extend well into the future.
Hope is certainly not lost for the United States. Unfortunately, a detailed discussion of all
the possible tax remedies would be enough for an article of its own. However, before we even
begin to discuss solutions, we have to acknowledge that a problem exists. Large, unfunded tax
cuts are a short-term sugar high that brings drastic consequences as they continue. The United
States must make a choice: not simply between tax cuts and prosperity, but between political
gimmicks and a tax system capable of funding the commitments Americans expect.
References
Blanchard, O. (2019, February). Public debt and low interest rates (Working
Paper 19-4). Peterson Institute for International Economics.
Engelhardt, G. V., & Gruber, J. (2004, May). Social security and the evolution
of elderly poverty (NBER Working Paper No. 10466). National Bureau of Economic Research. https://doi.org/10.3386/w10466
Finkelstein, A., & McKnight, R. (2008). What did Medicare do? The initial
impact of Medicare on mortality and out-of-pocket medical spending. Journal of Public Economics, 92(7), 1644–1668.
Huntley, J. (2014, February 28). The long-run effects of federal budget deficits
on national saving and private domestic investment (Working Paper 2014-02). Congressional Budget Office.
NBC New York Staff. (2026, March 10). Sen. Cory Booker’s new bill could make your first $75,000 of income tax free. NBC New York.
The Budget Lab at Yale. (2026, March 12). Senator Booker’s Keep Your Pay Act.
U.S. Department of the Treasury. (2026). Federal spending. Fiscal Data.