Trump Tax Bill May Add $5 Trillion Debt, Spark Inflation

The recent tax reform bill proposed by the Trump administration has sparked significant debate and concern among financial analysts and market participants. Deutsche Bank has highlighted that the bill, if enacted, would add approximately 5 trillion dollars in new debt over the next decade. This substantial increase in debt is primarily due to the bill's structure, which front-loads spending and tax cuts while delaying the implementation of offsetting measures until later years.

Deutsche Bank's Brett Ryan noted that the bill's design, which concentrates spending and tax cuts in the early years while pushing offsetting measures to later years, will lead to a rapid expansion of the deficit in the coming years. This could potentially trigger inflation and higher interest rates. The bill is expected to save approximately 1.9 trillion dollars, but a significant portion of these savings, around 1.2 trillion dollars, will only be realized in the latter half of the 10-year budget window.

The bill's structure, with 55% of the total deficit increase occurring in the first half of the budget window and only 40% of the offsetting measures accumulating during this period, means that 70% of non-interest borrowing will happen within the first five years. This front-loading of tax cuts and spending increases is achieved through the use of "sunset" provisions, which limit the reported cost by setting expiration dates for various tax cuts and spending increases. Many of these provisions, such as enhanced child tax credits and standard deductions, are set to expire in 2028 or 2029.

In contrast, many of the offsetting measures, such as work requirements for Medicaid and matching funds for the Supplemental Nutrition Assistance Program (SNAP), will not take effect until 2028 or later. This structure could lead to additional short-term borrowing, potentially stimulating inflation and pushing interest rates higher than current levels. If Congress extends the sunset provisions and eliminates some offsetting measures, this situation could persist, leading to a debt-to-GDP ratio exceeding 200% in the coming decades.

JPMorgan Chase has also weighed in on the potential impact of the tax reform bill, predicting that the deficit will reach 7.1% of GDP by 2026, an increase of approximately 310 billion dollars from the previous year. While the bill is expected to increase the deficit, JPMorgan notes that this is primarily due to secondary factors such as record-high interest payments and economic slowdown, rather than direct policy stimulus. The bill's impact on the economy in 2026 is expected to be limited.

The Responsible Federal Budget Committee (CRFB) has provided a more pessimistic outlook, estimating that the bill will increase the deficit by nearly 60 billion dollars in the 2027 fiscal year, bringing the total deficit to 2.3 trillion dollars. This would nearly double the baseline deficit, excluding interest payments. JPMorgan also notes that the bill largely continues the tax cuts implemented during the Trump 1.0 era, and if the bill is not passed, it would effectively result in a significant tax increase, potentially leading to an immediate economic recession due to the fiscal headwinds.