The Long-Term Fiscal Risks of Declining Tax Rates on High-Income Earners and Corporations

The debate over tax policy in the United States has increasingly centered on the fiscal consequences of reducing tax rates for high-income earners and corporations. While proponents argue such cuts stimulate economic growth and enhance competitiveness, a growing body of evidence suggests they pose significant risks to government revenue sustainability, public debt levels, and long-term economic stability. As policymakers consider extending or expanding these tax cuts, investors must grapple with the implications for fiscal policy and market dynamics.

Revenue Sustainability and the Fiscal Imbalance

Recent analyses underscore how tax cuts for the wealthy and corporations have eroded government revenue. The "Big Beautiful Bill" (BBB), for instance, is projected to reduce taxes for the top 10% of households by over $14,700 annually and for the top 1% by more than $50,000, resulting in a $4.5 trillion revenue loss over the next decade according to American Progress. These cuts, driven by measures like lowering the top marginal income tax rate from 39.6% to 37% and expanding the estate tax exemption, disproportionately benefit high-income earners. Similarly, the 2017 Tax Cuts and Jobs Act (TCJA) slashed the corporate tax rate from 35% to 21%, with revenue losses of $919 billion from FY2018–2027.

Critics argue these reductions undermine the ability of governments to fund essential programs. For example, the BBB's tax cuts for the wealthy have coincided with proposed cuts to SNAP and Medicaid, while corporate tax cuts have forced states to rely on regressive local property taxes, exacerbating inequities in public service funding. Such trends highlight a growing fiscal imbalance, where tax policy increasingly favors capital over labor, straining public finances.

Public Debt and the Cost of Borrowing

The fiscal gap-the disparity between tax revenues and spending required to stabilize debt as a share of GDP-has widened significantly due to these tax cuts. According to the Economic Policy Institute, extending expiring TCJA provisions would increase the fiscal gap by nearly 50%, from 2.1% to 3.3% of GDP. This imbalance is compounded by the "tax gap," the amount of unpaid taxes owed, which is driven largely by underpayment by high-income households and corporations.

When tax cuts are financed through deficit spending, they raise borrowing costs for governments and the private sector. Data from the Bipartisan Policy Center indicates that deficit-financed tax cuts can drive up interest rates, increasing the cost of servicing public debt and potentially fueling inflation. In a macroeconomic environment marked by low unemployment and high inflation, such policies risk dampening growth rather than stimulating it. For instance, while some analyses suggest the BBB could boost GDP by 4.6% in the short term, most estimates project only modest gains, with long-term effects being neutral or negative due to rising deficits and interest rates.

Economic Stability and Distributional Consequences

The economic growth generated by tax cuts is often overstated, particularly when benefits are concentrated among high-income earners and corporations. A distributional analysis reveals that while all income groups may see some gains, the wealthiest households and businesses capture the lion's share. This concentration of benefits exacerbates inequality and weakens the broader economic foundation, as lower-income households-disproportionately affected by cuts to social programs-face reduced consumer spending power.

Moreover, the reliance on deficit financing to offset revenue losses creates a vicious cycle. As government debt grows, so does the risk of financial instability. A report by the Real Economy blog notes that rising debt levels could destabilize financial markets, increase volatility, and reduce investor confidence in long-term fiscal sustainability. This dynamic is particularly concerning for investors, as it may lead to higher risk premiums and reduced returns on government-backed assets.

Conclusion: A Call for Fiscal Prudence

The evidence is clear: tax cuts for high-income earners and corporations, while politically popular, come at a steep fiscal cost. They strain government revenue, exacerbate public debt, and threaten long-term economic stability. For investors, the implications are twofold: first, a growing risk of fiscal mismanagement that could undermine market confidence; and second, a need to reassess portfolios in light of potential policy shifts aimed at addressing these imbalances. As the 2025 tax debate unfolds, the challenge will be to balance economic growth with fiscal responsibility-a task that demands far more nuance than the current binary choices of "tax cuts for all" or "austerity for none."