US tax cut and government debt

The US recently announced a $1.5 trillion tax cutting plan aimed primarily at businesses but also benefiting individuals directly. See this article for specifics. Obviously the plan still needs to be approved and there may be some changes made but this blog is not about the specifics of the US tax cuts but about the tolerance of government debt. 

All else being equal, cutting tax by $1.5 trillion means less income for the US treasury by the same amount and thus an increase to their already very large levels of debt (over 100% of GDP). However, what will be interesting to see is if these large and sudden tax reductions (if they materialise) will stimulate the economy and thus perhaps offset the initial reduction in tax revenues. If companies and individuals use the tax savings to expand and spend more . . . . who knows.

No doubt economists will look at these developments with keen interest. In the meantime, this potential tax cut seems to reinforce the tolerance of large government debt levels but if things go wrong, it will add to the bill the next generation will have to pay. Unless by then there is yet even more appetite for government debt.

As always, any comments and views are welcome.  

Anonymous