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Sunday, May 9, 2021

Tax cuts and infrastructure spending, two approaches to stimulating economic growth that rival tax cuts and infrastructure spending. Who should get credit?

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With the U.S. economy on the cusp of growth, suddenly the debate in Washington over whether it should be stimulating (or tamping down) growth can be pretty hair-raising.

Part of the confusion arises from the way economic measures are constructed. Tax cuts and infrastructure spending can both be “promoted” as new fiscal stimulus, or “discharged” as removing existing fiscal stimulus. Or they can be classified as borrowing to expand economic activity.

For Washington, however, the headline is clear: More debt. The Tax Cuts and Jobs Act is adding about $1.5 trillion to the government’s debt by 2027. And the big infrastructure package — which the administration had initially said was “budget neutral” — will add more than $1 trillion to the debt over the same period.

None of this is particularly complicated, and certainly not if you understand the way the U.S. government combines the numbers. But for the public at large, it has created a divided and murky picture: The Trump administration says more debt is needed to grow. Democrats say we shouldn’t add to the debt and instead focus on what’s on the table: tax cuts and infrastructure spending.

The constant debate in Washington is simply indicative of the fact that the economic agenda in Washington goes up and down like a roller coaster, and the policy proposals are often several years apart from the best thinking in the private sector.

Earlier this year, the details of the biggest tax cut in a generation — up to $1.5 trillion — were thrown into turmoil when it emerged that the Trump administration had not agreed with the nonpartisan Congressional Budget Office on the size of the tax cut. When they did finally hammer out a deal, details such as the overall size of the cut were shifted, altering a high-profile aspect of the promise.

At the same time, Republican proposals for big infrastructure spending — despite a lack of broad support from the Trump administration — have also put off political commitments.

At the very least, taxpayers can rest easy that the revenue windfall of the Trump tax cuts will vanish by 2027. Whether the infrastructure bill is able to extend the same benefit will depend largely on whether it turns out to be as big as advertised, and how President Trump’s own Cabinet approves the final version.

So, it seems, the debate about whether we should add to the debt or not will take some time to sort out, with similar bills expected later this year.

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