Tax cuts vs. debt reduction: GOP presidential debate illustrates conundrum

A discussion of the “elephant not in the room,” in the words of one of the moderators of last Wednesday’s Republican presidential candidate debate, didn’t come until about one hour into the jousting. The elephant, of course, was frequently indicted former President Donald Trump.

Most of the candidates tiptoed around Trump. They also avoided a substantive exchange about another elephant facing the eventual GOP nominee next year: the yawning federal debt.

Former South Carolina Gov. Nikki Haley was honest enough to say that both parties have contributed to the burgeoning debt. Republican candidates like to blame spending by Democratic administrations, but Haley pointed out the GOP knows how to open the spigot, too.

“The truth is that Biden didn’t do this to us, our Republicans did this to us, too,” she said.

Haley said plenty of Republicans voted for Covid spending bills. She also noted that three candidates on the stage — former Vice President Mike Pence, Florida Gov. Ron DeSantis and South Carolina Sen. Tim Scott — voted to raise the debt limit. Pence and DeSantis did so when they were in the House.

“And Donald Trump added $8 trillion to our debt,” Haley said. “And our kids are never going to forgive us for this.”

But when it came to ways to tackle the debt, Haley was less bold than when she was parsing the blame for it. She said it’s imperative to “stop the spending … stop the borrowing … [and] eliminate the earmarks.”

Those steps are the equivalent of using a chisel to bring down the mountain of debt, which the Committee for a Responsible Federal Budget estimates will rise from $29 trillion to $36 trillion over the first four years of the next presidential administration. That means the debt will grow from 102% of gross domestic product to a record 107%, according to the group.

Pence has been more forthright than the other candidates about reducing entitlement spending, which has lighted the fuse on the debt explosion.

“I was the first person in this race to say that we’ve got to deal with the long-term national debt issues,” Pence said. “You got people on this stage that won’t even talk about issues like Social Security and Medicare.”

That may be true. But Pence also championed a policy move that will add more fuel to the debt fire when he advocated extending the tax cuts ushered in by the 2017 tax reform bill that Trump signed into law. That legislation will add $1 trillion to $2 trillion to the federal debt, according to the Tax Policy Center.

“[A] lot of people don’t know that those Trump/Pence tax cuts that we got signed into law go away at the end of 2025,” Pence said. “[W]hen I’m president of the United States, we’re actually going to … extend those tax cuts.”

If Pence is elected and Republicans control the House and Senate in 2025, he will be able to extend the 2017 tax cuts. That will exacerbate the federal debt.

Talking about the federal debt truthfully — tax cuts as well as spending contribute to the problem — and proposing legitimate ways to bring it down — entitlement reform — may be too much to ask of any presidential candidate. Following through is even tougher politically.

 “I think everyone understands the value in cutting our debt level,” Tim Steffen, director of advanced planning at Robert W. Baird & Co., wrote in an email. “But when push comes to shove, people tend to fight for what's in their own best interest. And in most cases that means tax cuts.”

Financial advisors also are wrestling with the tax-cuts-versus-debt-reduction conundrum. I quoted several of them in a recent story cautioning Congress to balance debt reduction with lifting the $10,000 cap on the deduction for state and local taxes. The SALT cap was added to the 2017 bill to help pay for its long roster of tax cuts.  

“The tax code is very complex, and there is always a desire for all deductions,” Scott Bishop, managing director of Presidio Wealth Partners, wrote in an email. “But if we can’t get our spending under control, revenues will continue to be needed. It’s an ugly Catch-22.”

Joanne Burke, founder of Birch Street Financial Advisors, has mixed feelings about whether it’s more important to cut taxes or the federal debt.

“While I am always an advocate for reducing my client's and my own tax burden, I think we need to address the looming debt and quit kicking the can down the road,” Burke wrote in an email. “While I am working with clients to be fiscally responsible, I think Congress needs to be as well.”

That would be the ideal outcome, but it would take a level of political fortitude we’re not seeing so far in the presidential campaign.