The U.S. fiscal outlook is dire, but don’t blame it on tax reform.
President Donald Trump’s budget demonstrates that the GOP-passed tax cuts are entirely sustainable—it’s the spending that’s the problem.
It is worth remembering where we were before tax reform. Without the Tax Cuts and Jobs Act, government scorekeepers projected that the government would consistently tax away a larger share of the economy than the historical average. In 10 years, Americans would send 18.4 percent of the economy to Washington—about $300 billion a year more than normal. Taxes were projected to increase further from there.
The GOP tax cuts provided much-needed relief, knocking back the trend of the IRS whisking away increasingly larger shares of the economy.
Even with the supposedly budget-busting tax cuts, the president’s new budget proposal would still bring in more revenue than historical averages by the end of the 10-year window. That even includes an additional $540 billion in tax cuts for individual families by extending major provisions that currently expire after 2025.
Unlike additional government spending, properly designed tax cuts let people keep more of their own money, allow the economy to grow, and lead to higher wages and better economic opportunities.
Yes, the president’s budget projections are buoyed by what some may claim are rosy economic assumptions, but with the right policies, 3 percent real growth in gross domestic product is within the realm of the feasible. This would simply represent a return toward the long-run trend. Critics who cry foul are only distracting from the real problem, which is spending.
Less than two months after the historic tax reform, which is already boosting wages, increasing job opportunities, and cutting Americans’ taxes, Congress promptly decided to raise spending.
It roughly increased spending over the next 10 years by the same amount it cut taxes, assuming the spending increases are permanent (which they tend to be). That’s the exact opposite of what was needed.
The spending deal, which was passed in early February, increases 2018 and 2019 budget authority by much more than any Obama-era spending cap increase. Such a dramatic departure from fiscal sanity is reckless.
Without serious spending reform, tax cuts are doomed to fail.
Congress and the president are repeating the mistakes of history. When legislators have in the past been unwilling to address out-of-control spending, they have sought new sources of revenue or allowed tax cuts to expire.
Portions of both the Reagan tax cuts in the early 1980s and the Bush tax cuts in the early 2000s were ultimately reversed. So spending cuts are a critical component of making tax reform sustainable.
Conversations in the nation’s capital have already turned to finding new sources of revenue in the face of systemic deficits and growing debt. Others have decried the president’s audacity to propose extending the just-passed tax cuts.
A growing and ever-present deficit will imperil the successes of tax cuts and economic opportunity. Wrongheaded analysis will ultimately force Congress to make a false choice between letting the temporary tax cuts expire and extending them at the cost of further increases to the debt.
What Washington often forgets is the third option: cutting spending. The problems of the deficit and debt are driven by too much spending, not too little tax collection.
Adam Michel focuses on tax policy and the federal budget as a policy analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Editor's Note: This piece was originally published by The Daily Signal.