Government of the rich, by the rich, for the rich

By Ryan O’Connell*

Donald Trump is not afraid of bankruptcy. During his checkered business career, he often took on too much debt, and six of his companies went bankrupt.

Now, with the enormous tax cuts for the ultra-rich in his One Big Beautiful Bill (OBBB), Trump is laying the groundwork for bankrupting the U.S. federal government. At a minimum, his policies will wreck the country’s finances for decades.

The elite benefit the most

The top 0.1% of U.S. taxpayers will benefit handsomely from the extension of Trump’s 2017 tax cuts. That fortunate group includes the President, his family and his top donors, who have now been rewarded for their support. They will be able to buy more planes and bigger yachts.

Lower-income and middle-class Americans will receive little to no benefit from the tax cuts. Instead, they will pay higher energy prices and mortgage rates. Tens of millions of Americans will lose access to medical care and food stamps because of sweeping reductions in government assistance programs.

A deeply unpopular law

The law will eliminate most of former President Joe Biden’s tax incentives for alternative energy initiatives, such as for wind and solar power and electric vehicles. This will raise the cost of energy.

The new law could prevent the U.S. auto industry from competing with Chinese car companies, which already dominate the EV market globally. U.S. car manufacturers could go the way of the dodo bird.

Voters oppose the tax cuts by a 2:1 margin, partly because the Republicans are “paying” for them by shredding key parts of the social safety net.

The big question is: Will the President and the Republican Party pay a price for ramming this bill through, despite the public’s objections?

A staggering debt burden

The Big Bad Bill extends permanently Trump’s 2017 tax cuts for individuals, which would otherwise have expired at the end of this year. The OBBB added some other goodies that Trump had promised during his campaign, such as no taxes on tips or overtime and a larger standard deduction for some Social Security recipients.

Theoretically, those provisions will expire in a few years, but that is merely a gimmick to reduce the nominal cost of the tax cuts. The Congressional Budget Office (CBO) estimates that the law will add a cumulative $4.5 trillion to government deficits over the next 10 years.

Republicans pushed through roughly $3.8 trillion in tax reductions. However, they cut “only” $1 trillion in government spending, primarily by slashing spending on Medicaid, food assistance and other safety net programs.

The federal debt is already a staggering $30 trillion, up from $18 trillion in 2015. As the government’s borrowing continues to soar, it will incur about $700 billion in additional debt-service costs over 10 years. The CBO included those expenses in arriving at its $4.5 trillion estimate.

Oceans of red ink

The U.S. government is already running a lot of red ink, with a projected $1.9 trillion deficit for fiscal year 2025. However, the Trump tax cuts will increase the total deficit by 20% over the next 10 years.

To put these numbers in perspective, in 2016, just nine years ago — before Trump’s first time in the White House — the federal deficit was a mere $500 billion. After Trump passed his tax cuts for corporations and wealthy individuals in 2017, the deficit jumped 80% to about $900 billion in one year. Although Congress increased spending on some programs, the tax cuts were the main driver.

Trump claimed then, as he does now, that the tax cuts would stimulate high economic growth. However, that did not happen with his 2017 tax cuts. The CBO, the Budget Lab at Yale University and the Penn Wharton Budget Model group do not expect the extension of those tax cuts to spur much growth this time, either.

Way above 3% of GDP

As a rough rule of thumb, the government of a nation with a mature economy should not run a deficit greater than 3% of GDP. The United States generally followed that approach (except in recessions) until Trump became President in 2016.

Deficits continued to climb in 2020-2021 because of Covid relief programs during the height of the pandemic. The Biden administration did make some progress on reducing the deficits, but they remained too high.

The projected deficit rate for 2025 is over 6.5% — more than double what it should be. The U.S. government should be working assiduously to reduce its deficits to the 3% range.

Instead, because of the OBBB, deficits will be stuck around 6% for most of the next 10 years. This is fiscally irresponsible and not sustainable in the long-term. The government should be raising tax revenues to close its budgetary gap, not cutting them.

Piling on the debt

The U.S. federal government will have to borrow vast sums of money to finance its huge deficits. Even before the OBBB was passed, the CBO had forecast that U.S. government debt could rise from the current $30 trillion to $52 trillion in 2035.

Now, the CBO projects that Federal debt could jump to $85 trillion in 2045 and $138 trillion in 2055, according to the Budget Lab’s The Financial Cost of the Senate-Passed Budget Bill.

In 2015, the United States had a reasonable debt to GDP ratio of 74%. At that time, governments in large, developed countries tried to stay below 85%, although the ratios had increased for several European nations after the Euro crisis of 2010-2012.

No end in sight

Now, unfortunately, U.S. debt equals 100% of GDP, which is not a healthy relationship. The CBO projects that the debt/GDP ratio will jump to 118% in 2035, 136% in 2045 and 156% in 2055, according to the Budget Lab.

Those would be astronomic levels, particularly since the United States depends on foreign countries such as China and Japan to purchase much of its debt. By comparison, Greece — not exactly a role model as a borrower — has a debt to GDP ratio of 156%.

At some point, investors may demand higher interest rates to compensate for the increased risk of owning U.S. Treasuries. Or the Chinese and Japanese, tired of being pushed around by Trump, may scale back their exposure to Treasuries, which would also lead to higher interest rates.

Any of that would drive up the rates on U.S. mortgages, car loans, bank loans and other borrowings.

The rich get richer and the poor get screwed

Trump’s 2017 tax cuts favored the ultra-rich and did not help lower-income and middle-class Americans much, if at all. The extension of those tax cuts will follow the same pattern, except that this time, the Republicans have partially — and very cynically — “paid” for them through steep cuts to Medicaid and food stamp programs.

Who will benefit from the OBBB? The top 0.1% of taxpayers — those with incomes over $4 million — should gain on average about $390,000 in after-tax income, or about 10%. For Americans earning $1 million, their after-tax income would rise by about $90,000 or 9%.

Heading down the economic ladder, the benefits shrink rapidly for taxpayers. A middle-class family with wages of $80,000 will get a 2% rise in after-tax income or about $1,600. And for those earning $50,000 or less, their after-tax income will actually fall by $700, because of the safety net cutbacks, according to the Penn Wharton Model.

A financial straitjacket

Because the United States has run deficits for 30 years and borrowed increasing amounts of money, the government will spend about $950 billion on interest payments in 2025, according to the CBO.

That is more than the United States spends on defense. The CBO expects that figure to double to $1.8 trillion by 2035.

This will put the United States in a financial straitjacket. The interest burden will fall so heavily on the government that it will have to reduce its expenditures on critical programs.

Taking an ax to Medicare and food stamps

The Republicans wanted to take advantage of the Senate’s budget reconciliation rules, so they could pass the OBBB with only 51 votes. To comply with the rules, the Republicans had to find $1 trillion in so-called “savings” to reduce the overall cost of the tax reductions.

So, they focused on cutting spending on Medicaid and food stamps. Through the OBBB, the Trump administration will impose work requirements and time-consuming certification burdens as a “stealth” way to reduce access to those programs.

Democrats, looking back over recent decades, are very proud that they reduced the number of Americans without medical insurance by almost 50% — from 45 million people to 25 million.

They accomplished this by expanding access to Medicaid and lower-cost insurance policies through the Affordable Care Act and additional subsidies provided by the Biden Administration. In most countries, that would be considered an admirable achievement.

But Republicans have tried dozens of times to repeal the ACA, complaining about supposed “fraud, waste and abuse.” Never mind that it is medical providers, not their patients, who commit fraud and abuse the program. Patients do not receive any cash payments — they just get to see a doctor.

Making America Grim Again

By passing the OBBB, Republicans have finally achieved their dream of repealing the ACA. They will reverse about 75% of the expansion of medical insurance realized through the ACA. About 16 million Americans could lose their Medicaid benefits. That is about 20% of the program’s participants.

Furthermore, about three million Americans could lose access to food stamps and others might have their benefits reduced, according to the CBO. Many of these people may also rely on Medicaid to pay for their medical bills.

Conclusion: Turning the U.S. into a banana republic

Trump’s massive tax cuts will put the U.S. government in a financial straitjacket. His harsh reductions in Medicaid and food assistance programs will cause millions of Americans to suffer from sickness and hunger. Trump has found his role model: Ebenezer Scrooge.

The United States could wind up resembling certain Latin American countries: Low taxes for the elite, limited government services for ordinary citizens and a tattered safety net.

That would be quite a legacy. Ebenezer Scrooge would be impressed.

*Ryan O’Connell spent his career on Wall Street as a lawyer, banker and for 25 years as a bond analyst for firms including Moody’s, Citigroup, Morgan Stanley and Bloomberg. 

**first published in TheGlobalist