Just as the Republican presidential race looked like it was losing steam and Donald Trump was plateauing as a candidate, the man with the golden hair managed to once again get on the top of the news cycle. Revealing his tax plan, Trump took a big step toward elevating his campaign from a reality show to a serious bid for the White House.
As one could expect from The Donald, his tax plan is bold and attention-grabbing. I will leave it to the tax policy experts to argue the technical details of his reform plan; with no disrespect, those arguments will play second fiddle to a bigger issue, namely the relation between the Trump tax plan and government spending.
Before we get there, though, let us listen to a quick summary of the report. ABC News explains:
“Donald Trump unveiled a tax plan Monday that would cut rates across the board and reduce the amount paid by wealthiest Americans and corporations into the U.S. Treasury. The plan, which Trump said would “provide major tax relief for middle-income and for most other Americans,” appears certain to come with a significant price tag that experts said would likely add to the national debt, despite Trump’s assurances.”
Trump himself claims that his plan is “paid for” with the closing of loopholes, elimination of deductions and other simplifying and neutralizing measures. I am going to assume that he is correct (an assumption bold enough to befit anything Trump) and instead ask the billion-dollar question:
What does Trump want to do about government spending?
For two reasons, The Donald needs to answer this question. The first is the galloping government debt, which he has yet to mention in any meaningful context. If he becomes the next president without a clear idea of how to rein in our debt, he will almost certainly have to deal with a real, and painful debt crisis.
The second reason is that his tax plan, bold as it is, essentially follows in the footsteps of supply-side reforms under Reagan and Bush Jr. In both cases, the reforms were carried out in isolation from spending.
It is important to remember what the purpose is behind a supply-side tax reform. While originally designed to stimulate private-sector growth and jobs creation, the way those reforms have been practiced their purpose is really to increase tax revenue. Both the Reagan and the Bush tax cuts were “sold” as measures to grow revenue enough to close the budget gap and pay for current spending.
In other words, supply-side economics as practiced has been a vehicle for funding large government spending programs.
Trump’s assurances that his tax reform is “paid for” tells us that he is concerned about the budget deficit. But if he wants to make sure that there is no negative budget effect from his reform he should include something about spending in his arguments for his tax plan.
Again, history is an authoritative teacher. President Reagan’s record when it comes to deficits is not exactly stellar: he presided over the largest deficits in modern times (as percent of GDP) with the exception of Obama’s first term.
President Bush Jr. left office with a budget deficit that was three times larger than the budget surplus when he took office in 2001.
Does this mean that supply-side tax cuts are good in theory but useless in practice? No, that is not the conclusion we should draw. Both Reagan and Bush made the big mistake of forgetting about the spending side of the budget. Reagan signed budgets that increased federal spending by 7.7 percent per year on average. Bush Jr.’s spending record is almost as bad: 6.6 percent per year (6.2 percent not counting military).
Both presidents let Congress treat the new revenue, created by the supply-side reforms, as manna from heaven. Trump needs to learn from their mistakes. Instead of isolating his tax reform from spending, he should not approve any expansion of any program until his tax reform has balanced the federal budget. That way he not only guarantees growth and jobs creation, but he also provides security for those who depend on entitlements. When government does not have to borrow money to pay for regular expenses, there is no risk that a fiscal crisis will force the president and Congress into panic-style spending cuts.
Congress could certainly lend a helping hand here, regardless of who the next president will be. They could break with their spending habits, which remind my old friend from college who won $100,000 on lottery. It took him less than two months to spend it all – and he did not even buy himself a car.
But just in case Congress punts on spending reform, Trump might want to pledge budget balance before spending growth. If he does not do that; if he ignores the outflow side of the federal budget; he could become yet another ambitious Republican supply-side president whose legacy vanishes in the dark shadow of a monumental government debt.
On the bright side, he still has time to make up for that omission. And given his otherwise bold presidential candidacy, we can probably expect something very interesting if he decides to address entitlements.