Gordon L. Weil
It’s all about the Laffer Curve.
President Trump’s “One, big, beautiful bill” to cut taxes
and spending has run right into it.
The Laffer Curve, an idea promoted by economist Arthur
Laffer, has been around since Ronald Reagan was president.
It’s about the relationship between the level of taxes and economic
growth. If taxes are too low, the
government puts too little money into the economy to promote growth. If taxes are too high, the government takes
too much money out of the economy, slowing growth.
There’s a sweet spot when the tax rate is just right. At that point, taxes allow government to play
its proper role in the economy and individuals and companies the right amount of
money to keep the economy growing. Nobody
knows where that sweet spot is; it’s a matter of opinion.
The BBB would lower taxes and could be enacted with only loyal
Trump GOP votes. The euphoria of the federal government under a single party
and the resulting belief that it could easily enact the president’s proposal are
now meeting the realism of American politics.
The iron law seems to be that the people – even conservative
Republicans – expect much from government but do not want to pay enough taxes to
get it. They reasonably add some debt to
the mix, though they must avoid letting debt service feed on itself, always growing
greater.
Here’s what the BBB would do.
First, it would extend major tax cuts for individuals that
are set to expire and create new tax breaks, ranging from no tax on tips to
lower rates for the wealthiest taxpayers.
These add up to huge tax breaks that Trump promised in his campaign.
Second, it would cut spending to pay for some of the tax
reductions. To even begin to raise
enough money, it would require slashing Medicaid, green energy support and much
else.
Third, it would inevitably increase the national debt to pay
for the tax cut costs not covered by spending cuts. For that purpose, the debt
ceiling, which is little more than a symbolic political gimmick, would have to
be raised.
This combination is causing big trouble for Congress and may
result in Trump’s BBB falling well short of his promises.
The individual tax cuts were set to expire after Trump’s
second term, assuming he had been re-elected in 2020. Because he skipped a term, they expire during
his presidency. He would make them
permanent, but that is costly. Added tax
cuts, promised in the campaign, would massively increase the national debt.
The neutral Congressional Budget Office says the BBB could
increase the national
debt by $2.8 trillion over the next 10 years.
Traditional GOP conservatives reject increasing the national
debt. Even for their president, they
cannot accept trillions more of new debt.
Some creative bookkeeping to disguise debt is supposed to satisfy them,
but it is not working.
Debt
service is now greater than either national defense spending or Medicaid,
and conservatives are looking for debt reduction not a further increase.
As for spending, the budget cannot be cut the way Trump and
Elon Musk would like. The budget deficit
is not simply a matter of wild Democratic spending. Instead, it results from members of Congress
responding to the demands, needs and desires of the voters.
Constituencies composed of millions of voters favor Medicaid
for the poor, health research, renewable energy development, farm payments and
a myriad of other government programs. Members of Congress cater to their
constituents to stay in office. They support most federal appropriations and protect
each other’s priorities.
The worst is yet to come. Social
Security will soon stop paying for itself. Voters are likely to oppose massive cuts to
it. Congress will have to find funding.
Right now, Trump doesn’t have the votes for BBB.
While spending cannot be cut as Trump wants, there’s room for
some reductions. Nothing should be automatic.
Each agency should have to justify regularly all its spending subject to
line-item review, not a Musk meataxe. The president and GOP Congress can set their
priorities, like killing foreign aid, but cannot achieve them all.
The Laffer Curve stands in the way of a tax increase. Republicans see the U.S. as being past the
sweet spot, suggesting that a tax cut would boost the economy, increase
government revenues, and pay for itself.
There’s no historical evidence supporting such optimistic
expectations. The unforeseen economic
effect of the Covid pandemic proves that.
The answer to finding a sound federal budget without endless
debt increases must be a combination of setting spending priorities and tax
increases. Voters must accept the need
to pay for the government services they want.
It’s time to stop hiding behind the self-serving appeal of the Laffer Curve and recognize that tax increases on upper income people must come.
