Moody’s Inconvenient Reminder

Tax Cuts are Revenue Cuts

The national debt clock is displayed at a bus station in Washington on April 14, 2025. Madalina Vasiliu/The Epoch Times

Commentary

The U.S. financial markets and the American consumer are both expressing concern about the state of the economy. The impact of tariffs, downgrades, deficits, tax bills, and inflation are each being weighed.

The United States has a severe spending problem, which most of the time we’re able to conveniently ignore by issuing more debt. Until the underlying addiction to debt and deficits is addressed, shifting revenue from one source (income taxes) to another (tariffs) might feel good, and may indeed be beneficial to American households, but it won’t be sufficient to restore our nation’s fiscal health.

Over the weekend, the House Budget Committee passed by a narrow margin the “One Big Beautiful Bill” put forward by the Trump administration to advance its economic agenda. Last week, the Committee met resistance from both Democratic members and by some fiscally-conservative Republicans concerned that the reconciliation bill does not do enough to address the looming fiscal crisis in the United States.

On May 16, Moody’s Ratings, one of three principle credit ratings agencies in the country, finally downgraded the issuer rating of the U.S, government from Aaa, the highest level available, to Aa1. To some degree, this was old news. Moody’s was the last of the ratings agencies to make the long-anticipated move, following S&P in 2011 and Fitch in 2023. In each case, the rating agencies acted on similar concerns about the sustainability of the U.S. fiscal position. First, that the debt level is dangerously high, second, that the federal deficit is unsustainably wide as a percent of gross domestic product (GDP), and third, that Congress, characterized by political polarization, gridlock, and brinkmanship, is unable or at least unwilling to effectively govern or do anything to solve the problem.

For background, the federal debt is now approaching $37 trillion. This represents 125 percent of GDP, making the United States one of the most indebted major nations in the world, alongside Japan and Italy. Debt service payments (i.e., interest) now absorb 18 percent of federal government revenues. The United States hasn’t run a budget surplus since 2001, and in 2024 the deficit represented 6.4 percent of GDP, a level many economists view as unsustainable.

Markets, which tend to have short-term memories, are now refocused on the problem of the U.S. fiscal position. Equity markets have fallen, and bond yields have risen, to start the week. The bond market has pushed 30-year yields above five percent, signaling fear that the United States may struggle to borrow in adequate amounts to meet its refinancing needs.

Consumers are also uncomfortable. Despite April’s consumer price index (CPI) headline result, which at 2.3 percent represented the lowest level of reported U.S. inflation since February 2021, consumers don’t believe that inflation has gone away. U.S. consumer confidence is at its lowest level in three years as a result of inflation expectations, i.e., that prices are going to start rising again soon.

Walmart just confirmed Americans’ fears of looming price hikes. The bellwether retailer announced that it will raise prices in coming months on a wide range of products as a result of tariffs. Walmart’s CEO, Douglas McMillon, commented that “given the magnitude of the tariffs … we aren’t able to absorb all the pressure given the reality of narrow retailer margins.” Walmart shoppers represent over two-thirds of Americans, and, while inflation has yet to show up in the CPI, they know it is coming.

The United States runs twin deficits, meaning both a fiscal deficit, in which expenses exceed revenue by over $2 trillion, and a trade deficit, in which our imports of goods exceed our exports by over $1 trillion. Both must be addressed. The Trump administration’s tariff policies are focused on closing the trade deficit and bringing in additional revenue to begin to chip away at the fiscal deficit. But as I have written here, tariffs—at any level—won’t be enough to replace your taxes or close the deficit gap.

The “One Big Beautiful Bill” goes a long way to help protect the American taxpayer and reduce their tax burden. But one man’s expense is another’s income. Tax cuts benefit the U.S. consumer but come at a cost to government revenue. The Trump administration will have to do more to close the deficit. Cost initiatives such as DOGE are a necessary and important part of the solution, but at some point, we are going to have to face the harder challenge. How do we close a $2 trillion deficit, and start paying down debt, when the substantial portion of our expenditures are for sacred-cow entitlement programs such as Social Security and Medicare, and non-discretionary items like interest service and defense?

This is the dilemma of which Moody’s downgrade has reminded us.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.