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The Looming Debt Crisis: How Trump's Tax Bill Could Spark Economic Catastrophe

7/4/2025
Economists warn that Trump's massive tax cuts could exacerbate the U.S. debt crisis, potentially leading to higher interest rates and a doom loop that threatens economic stability. Learn why experts are concerned about the future.
The Looming Debt Crisis: How Trump's Tax Bill Could Spark Economic Catastrophe
Experts caution that Trump's tax bill could worsen the U.S. debt crisis, raising interest rates and threatening economic prosperity. Discover the implications of this legislation.

The Growing Concern Over U.S. Debt: A Warning from Economists

For decades, fiscal hawks have raised alarms about the potential consequences of escalating U.S. debt. However, leading economists assert that the current situation is notably different. The national debt has reached such staggering levels that further increases, particularly due to President Donald Trump’s expansive tax cut and spending bill, could place the nation on a perilous trajectory. Kent Smetters, a professor of economics and public policy at the University of Pennsylvania Wharton, likened the situation to a house engulfed in flames, stating, “It’s like the house is burning down and we’re throwing in some accelerant instead of some fire extinguisher.”

The Exploding Debt Path

Smetters emphasizes that even in the absence of this new bill, the U.S. was already on what he describes as an exploding debt path. He estimates the government has a maximum of 20 years to enact meaningful reforms before facing dire consequences. “If we don’t, the ramifications are pretty serious,” he warns. The bond markets, according to Smetters, can be unforgiving and carry significant disciplinary power over fiscal policy.

Trump's Tax Cut and Its Implications

At the heart of the ongoing debate is Trump’s sweeping policy measure, which the nonpartisan Congressional Budget Office (CBO) predicts will increase the federal deficit by $3.4 trillion over the next decade. The White House disputes this forecast, with Trump asserting on social media that robust economic growth and increased tariff revenues will counterbalance the bill's costs. “Our country is going to explode with massive growth... This bill sets us on course for enormous prosperity in the new and wonderful Golden Age of America,” he claimed.

Nevertheless, many economists challenge this optimistic outlook. They argue that Trump’s legislation represents one of the most expensive pieces of legislation in generations while simultaneously reducing the tax revenue the country collects for many years to come. The existing federal debt is already at record levels, roughly equal to the entire U.S. economy. Alarmingly, it is estimated that about one in every four dollars paid in personal income taxes goes toward servicing this national debt.

The Impact of Rising Federal Deficits

Economists have expressed concerns to ABC News, stating that larger federal deficits will lead to higher interest rates. This will result in more expensive mortgages and car loans, while simultaneously crowding out business investments that are crucial for enhancing worker productivity. Douglas Elmendorf, a professor at Harvard Kennedy School and former economist at the White House Council of Economic Advisers, elaborates on this issue, comparing it to a family that exhausts its credit cards and then faces an unexpected home repair. “You want to have a little room to maneuver in case bad things happen, and we are running out of that room,” he stated.

Challenges Ahead: Navigating Future Crises

The U.S. successfully navigated the financial crisis of 2008 and the COVID-19 pandemic through substantial federal spending, yet that debt remains unresolved. As a result, the government will have limited options in the event of another crisis. The perception of rising debt levels has often felt abstract, given that the U.S. has historically been perceived as the gold standard of economic stability. As the world’s largest economy and issuer of the global reserve currency, the U.S. has enjoyed strong demand for its debt. However, this demand is not guaranteed, and bond markets exhibited signs of apprehension earlier this year.

The Fear of a Doom Loop

Economists are increasingly concerned that investors may one day question the U.S. economy's robustness and its capacity to repay debt. This skepticism could trigger a doom loop: rising debt leads to increased interest rates, which in turn exacerbates the debt, making it increasingly challenging for the U.S. to issue its debt successfully. Elmendorf warns that Trump’s bill will elevate interest rates and heighten the risk of falling into this doom loop. However, the timeline for such a scenario remains uncertain.

If the doom loop does materialize, the U.S. could face severe austerity measures. Elmendorf cautions that falling into this cycle would necessitate significant cutbacks in federal benefit programs like Social Security and Medicaid, along with steep tax increases. “That will be really bad for people’s standard of living,” he added, underscoring the urgency for moderate actions to prevent such a situation from arising.

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