The U.S. government is bracing for significant fiscal challenges regardless of the outcome of the upcoming presidential election. According to the Congressional Budget Office (CBO), the federal deficit is projected to rise to 6% of GDP by 2033, up from 5.6% this year. Public debt is expected to increase to 114% of GDP from the current 99%, continuing its upward trajectory. These projections are based on assumptions of 2% inflation, real GDP growth, and stable interest rates, with non-defense discretionary and defense spending growing in line with inflation.
The 2017 Tax Cut and Jobs Act (TCJA) simplified and reduced individual income taxes while lowering business taxes. The combined average federal and state corporate rates now stand at 26.5%, aligning closely with European rates. However, most individual tax cuts under the TCJA are set to expire at the end of 2025, while corporate tax reductions will largely remain in place.
Tax, Spend, and Borrow
President Joe Biden’s proposed budget aims to repeal benefits for families earning over $400,000, increase taxes on the wealthy, and raise the federal corporate rate from 21% to 28%. These tax hikes are contingent on Democrats gaining control of Congress, a scenario that appears uncertain given the current Senate electoral map favoring Republicans. Should former President Donald Trump be re-elected, it is likely that the TCJA will be extended, potentially costing at least $3.3 trillion through 2033 and pushing public debt beyond the CBO’s forecast of 114% of GDP by that year.
Last July, the Treasury announced a significant increase in borrowing requirements to rebuild cash reserves following a budget ceiling standoff in Congress. This announcement led to a full percentage-point jump in the 10-year Treasury rate, reaching nearly 5% by late October. Without significant changes, such as allowing TCJA personal income-tax provisions to expire, U.S. debt could grow to at least 120% of GDP in the coming years. Interest payments might then constitute at least 6% of GDP, growing faster than nominal GDP.
Trump has proposed a 60% tariff on imports from China and a 10% tariff on all other imports. Additionally, he is reportedly considering lowering the federal corporate tax rate to 15% from 21%, which would cost the U.S. Treasury an additional $250 billion through 2033. In 2023, U.S. goods imports amounted to $3.1 trillion with an average tariff of about 2.2%. While Trump could maintain TCJA personal income-tax cuts and lower corporate taxes by imposing these tariffs, it would likely require letting U.S. defense spending decline as a share of GDP—an improbable scenario.
Trump ‘Train Wreck’
Trump’s proposals could lead to a financial “train wreck” for the nation. Higher tariffs would be partially absorbed by foreign producers but primarily borne by consumers. Relying on tariffs would be more regressive than allowing TCJA personal-tax provisions to expire because poorer households spend larger portions of their incomes and save less than wealthier ones.
Maintaining the federal corporate tax at 21% is desirable as there is significant evidence that TCJA encouraged more business investment. Raising it to 28% would give the U.S. the highest combined national and subnational rate among large Western industrialized countries. Many new investments in AI, especially foundation models, are being financed by retained earnings from Big Tech. Reducing this pool of capital threatens U.S. leadership in AI and the funds needed for advancements in electric vehicles, batteries, and a greener energy system.
To sustain adequate defense spending, avoid severe cuts in benefits for seniors and social safety nets, and invest in new industries, America will either need to adopt much higher personal income taxes or face slower growth and significant inflation.
