What’s Driving the Trump Deficits? Tax Cuts, or Spending?

Authored by: Matt Palumbo

We’re destined for the return of trillion dollar deficits next year, and if you’ve been reading the headlines, you know the media puts the blame exclusively on the Trump tax cuts. Here’s just a brief sampling:

  • “How The Trump Tax Cut Is Helping to Push the Federal Deficit Past $1 Trillion” – The New York Times
  • “Republican Tax Cuts to Fuel Historic U.S. Deficits – CBO.” – Reuters
  • “Tax Bill Will Lead to Trillion Dollar Deficits.” – Center for American Progress

Oh really?

While there’s no doubt that cutting taxes when there’s already a deficit will exacerbate it, the media is all too happy to overlook the effects that increased spending will have in driving future deficits.

The CBO published projections in April expecting a $804 billion deficit this year, and a trillion dollar deficit in 2019. Overall, the CBO projected deficits to be $2.7 trillion larger from  2018-2027 than they’d previously expected last time they released projections in early 2017. They split the blame about 60/40 between the tax cuts and spending, stating that “laws enacted since June 2017…. are estimated to make the deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results by reducing revenues by $1.7 trillion, and increasing outlays by $1 trillion.”

Interestingly, the CBO had expected the Trump tax cuts would reduce revenues by $2.8 trillion, but the stimulative effects they’ve had on employment and wages has caused them to revise those figures. They estimate that the Trump tax cuts are adding 0.7 percentage points to GDP each year. Furthermore, another $582 billion of the “cost” of tax cuts doesn’t stem directly from the tax cuts, but rather from rising interest rates (as expansionary fiscal policies tends to lead to higher interest rates).  With the effects of rising interest rates factored in, Trump’s tax cuts and increased spending deserve about equal blame.

While the CBO is projecting out a decade, if you view the current situation (projecting out only to the end of 2018 and 2019), it’s clear that we have a spending, not a revenue problem. While tax revenues are projected to flat-line this year and the next compared to 2017, that wouldn’t be a problem if spending levels did the same.

Clearly, they did not.

(Sources: Spending, Revenue)

While it would be easy to point the blame at Trump for not cutting spending, we wouldn’t have this problem if it weren’t for a GOP controlled Congress rejecting all his proposed spending cuts.

Remember when Trump promised $54 billion in spending cuts (or $540 billion of ten years) back in 2017? The Office of Management and Budget’s Director Mick Mulvaney confirmed that they didn’t materialize. “We had offered $54 billion worth of discretionary cuts in our budget back in March. Only about 4 or 5 billion have survived so far on the hill. We’re not going to be able to cut our way to balance.”  And just last June, the Senate rejected $15 billion in spending cuts that Trump requested, or $150 billion over a decade.

Trump isn’t the only one who can’t get supposed conservatives to cut spending either. Sen. Rand Paul’s proposed balanced budget bill, which would’ve balanced the budget by 2023 and cut spending by $13 trillion below the baseline over ten years, was rejected by the Senate 21-76 in May. Paul calls his plan the “penny plan,” as it would cut spending by only 1% – and then implement a spending freeze (which would essentially allow inflation to do the job of reducing spending). Sen. Mark Sanford proposed a similar plan, which he estimates would balance the budget by 2024. Neither plans would’ve raised taxes.

Not only has Congress rejected all attempts to cut spending – they won’t even allow a plan that mainly aims to balance the budget by freezing spending. Unlike liberals, our ideas work great on paper and in practice – so why is Congress keeping them on paper?