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Government spending: After tax reform, Trump will work to reduce it

Written By | Dec 9, 2017
Government spending issue.

Cartoon by Branco. Reproduced with permission. (See link below)*

WASHINGTON, December 9, 2017: It now appears that the tax cut promised by President Donald Trump will pass Congress and be signed into law before the end of this year. Once that happens, Congress and the President must address concerns about the deficit. Controlling Federal government spending will be high on their list. But only a uniquely focused president like Donald Trump will be able to actually reduce the rate of growth of government spending.

Since the Federal government spends much more money that it brings in, the government has carried an annual deficit for 50 of the last 55 fiscal years. The total of all deficits, otherwise known as the public debt, is now more than $20 trillion dollars. Government spending has doubled over the last nine years with no viable remedy in evidence.

Read also: Santa Claus Rally vs. Tax Reform vs. the Federal Budget

Given that the government collects total annual revenue of about $3.5 trillion, the Federal debt is now almost six times the government’s annual income. This is roughly similar to a household with annual income of $50,000 that’s attempting to pay down a mortgage of almost $300,000. There is no logical way a debt imbalance of that magnitude can be carried into the future. It follows, then, that the government must attempt to reduce its own heavy debt load without adding to it in the meantime.

But will the impending GOP tax cut add to that deficit?

According to the Congressional Budget Office (CBO), the GOP tax plan will add an additional $1.5 trillion to the public debt over the next decade.

That conclusion is wrong.

Tax cuts do not add to deficits. Excess government spending causes deficits.

In 1964, the Kennedy/Johnson tax cut was passed. This legislation lowered tax rates, especially for the highest income earners. Congress and then-President Johnson also agreed to limit government spending. The result was a growing economy that saw tax revenue increase every year, with some years witnessing a 10% increase in tax revenue. The new, lower rates generated more revenue along with a faster rate of growth in tax revenue.

Why, then, was the 1968 budget deficit four times greater than the 1964 deficit? Simply because annual spending between 1964 and 1968 increased by more than 50%.

Increases in government spending caused the current Federal deficit.

In 1981, President Reagan proposed a similar Kennedy/Johnson-style tax cut that reduced rates for all taxpayers, especially the highest income earners. Although the economy was mired in stagflation – defined, essentially, as a recession coupled with inflation – the Reagan tax cuts stimulated the economy so much that annual growth exceeded 7% in 1984. At the same time, inflation fell from a rate of more than 13% annually to about 3%.

The reduced tax rates were phased in over three years. In every fiscal year that followed the tax cut’s passage, tax revenue was greater than it was in 1981. In 1985, tax revenue increased by more than 10% over 1984. Yet, annual deficits tripled between 1981 and 1986. That’s because annual spending increased by nearly 30%.

In 1997 (effective in 1998) President Clinton lowered the capital gains tax rate from 28% to 20%. From 1997 to 2000, economic growth increased causing tax revenue to increase by 30%. During the same period, government spending increased by only 11%. (President Clinton declared that the era of big government was over.) The result: budget surpluses.

Trump’s tax cut will not add to the deficit.

President Trump will not be able to cut taxes absolutely, but he will be able to slow the rate of government growth. By doing that, the rapid increases in tax revenue resulting from an economy boasting a 4% to 5% annual rate of growth will shrink the Federal deficit not add to it.

The Obama administration seriously crippled America’s military capacity by ruinously slashing government spending on weapons systems and personnel. These questionable savings were channeled into income redistribution schemes including increases in welfare spending, increased food stamp allocations, free health insurance and generous unemployment compensation. To rein in government spending and get our military back up to fighting strength, redistributive expenditures will need to be reduced by the Trump administration.

Last month, President Trump said, “We’re looking very strongly at welfare reform, and that’ll all take place right after taxes, very soon, very shortly after taxes.” When the economy is growing at more than a 4% annual rate, current welfare recipients can find jobs again, reducing the need for food stamps and welfare payments. Additionally, welfare reform will likely include a work requirement as it previously did from the mid-1990s through the beginning of the Obama administration.

Last week Congress approved a two-week Federal budget extension, allowing the government to continue overspending and increasing the deficit. This extension, like all similar extensions in the past, was allegedly put in place to give lawmakers time to reach a compromise on spending levels for the current fiscal year.

Let’s hope the president holds firm, working with the slim GOP Congressional majority to control government spending, despite Democrats’ ceaseless efforts to increase spending on social programs that have never truly increased incomes of living conditions for the poor and disadvantaged.

President Trump wants a clean budget bill to address just the Federal spending issues. As the price of any agreement, Democrats want to “resolve” the DACA immigration issue in their favor at the same time, which enormously complicates a solution to the Federal spending issue. Predictably, the Democrats proclaim they will allow a government shutdown if DACA is not addressed to their satisfaction, blaming the shutdown as usual on the GOP.

Let’s resolve to handle these problems one at a time. Let’s pass a spending bill that attempts to finally control government spending so deficits won’t increase. Let’s get America moving again.

*Cartoon by Branco. Reproduced with permission and by arrangement with ComicallyIncorrect.

Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.