Why We Shouldn’t Let Deficits Drive Up Our Taxes

(The Heritage Foundation) —

There’s a good reason that most political debates are so frustrating: They often present us with false choices.

Take how some in the media reacted to the news that President Donald Trump wants another tax cut. Pointing to the growing budget deficit, they labeled the prospect of another cut as sheer folly.

Concerns about the deficit are well-placed. But the answer isn’t to abandon plans for Tax Cuts 2.0. Far from it. The answer is to pair it with Spending Cuts 1.0.

To see why, start with a basic fact: In order to grow, the American economy needs investment, like people need food and water. And businesses need confidence that the future holds opportunity, or they invest, innovate, and hire less. If taxes are expected to go up in the future, behavior changes today.

The only credible way to keep taxes low is to reduce the deficit. And we do that by cutting spending growth and expanding on the 2017 tax cuts by first making those cuts permanent.

It’s 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 have sent 18.4% of the economy to Washington — about $300 billion a year more than normal. Taxes were projected to increase further from there.

At the end of 2017, Congress cut taxes modestly and increased spending dramatically. The trillion-dollar deficit is the result of profligate spending, not pro-growth tax cuts.

Over the last year, federal tax collections increased by 4 percent. But spending increased at twice that rate, by 8 percent, according to the Congressional Budget Office.

Without serious spending reform, tax cuts are doomed to fail.

Congress and the president are repeating the mistakes of history. Following an unwillingness to stop the growth in spending, legislators have in the past 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.

This time around, Congress built tax increases into the 2017 bill — most of the tax cuts expire in six years. Spending cuts are a critical component of sustainable tax reform.

Without credible spending reforms today, American workers and businesses will continue to live under the threat of higher taxes in the future. This uncertainty ultimately depresses the expected economic benefits of the tax cuts — which are nevertheless allowing wages to rise, keeping unemployment low and supporting the longest economic expansion in our history.

The 2017 tax cut was a structural reform to the U.S. tax code to remove disincentives to work and invest. The tax cuts for individual Americans included lower marginal tax rates so that people can work and save more. The reform also cut taxes on new investments made in America.

Making these reforms permanent would allow businesses and individuals to plan more concretely for the future.

The ever-present constraint of the seemingly ever growing deficit imperils the successes of tax cuts and resulting economic opportunity.

Conventional analysis wrongly assumes that the only way to fix the deficit is through new taxes. But simply raising taxes won’t fix the deficit. Spending growth continues to accelerate faster than the U.S. economy every year into the future.

The problems of deficit and debt are driven by too much spending, not too little tax collection.

In an era of trillion-dollar deficits and $23 trillion in accumulated debt, it is even more imperative to keep taxes low. America is at an inflection point.

Without a clear signal from Congress that taxes and the spending they fund will stay low, Americans will simply continue waiting for the next shoe to drop.

They need the positive certainty that comes with a combined package of tax cuts and spending cuts. Anything else portends higher taxes, fewer jobs, and a weaker economy.

Adam N. Michel is a senior policy analyst in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.

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