Budget Hawks v. Tax Cutters: The Republican Dilemma
“The only reason God put Republicans on this earth was to cut taxes,” stated the late columnist Robert Novak, who also was a strong supporter of supply-side economics. Tax reduction is a pillar of conservative fiscal policy. The making permanent or extension of the Tax Cuts and Jobs Act of 2017 (TCJA) is a main fiscal policy priority for President Donald Trump and the Republican-led Congress.
For the most part, Republicans agree that the TCJA benefits taxpayers and the economy and should be made permanent. However, tension is brewing between spending cuts and tax reductions. Republicans are in a pickle. The failure to extend or make permanent the TCJA will have severe economic consequences. But, extending the TCJA without meaningful spending reductions could make the national debt worse. (RELATED: From GDP to Reality: Putting the $35 Trillion Debt Into Perspective)
For decades, there has been a bipartisan out-of-control spending problem, leading to more than $36 trillion in national debt.
The Republican Party, as the more conservative party, should be more fiscally conservative, but that hasn’t always happened. With the creation of the Department of Government Efficiency (DOGE) headed by Elon Musk, President Trump appears to be serious about finding ways to reduce regulation, waste, and bureaucracy. DOGE has also encouraged members of Congress who are eager to reduce spending.
The crusade to cut spending is already becoming difficult. For starters, the Washington Times has reported that some Republicans are starting to get anxious that spending cuts, especially if it impacts their district, will hurt them in the midterm election. In addition to faster economic growth with TCJA, there is a need for spending reductions not to crowd out that growth and counter the positive effects of the tax cuts.
Another potential problem is that many lawmakers are advocating for special tax carve-outs.
These include a tax deduction for emergency power generators, increasing the cap on the state and local tax deduction (SALT), no tax on tips, and a 15 percent corporate tax rate for companies manufacturing in the U.S., among others. While these carve-outs have different interest groups, they will reduce the amount collected to “pay for” the overall tax cut package and provide little to no incentives for growth.
With a small majority in the House and having to find agreement in the Senate, Republicans do not have much room for defections. Concerns have been raised that “budget hawks” may scuttle any tax bill. As an example, the Committee to Unleash Prosperity is “worried that some House Republican budget hawks — many of whom are our friends — want to hold the tax cut hostage to force Congress’s hand on spending cuts.”
It should be noted that the committee does not oppose spending cuts and, in fact, they support efforts to lower spending, but they make the correct argument that the failure to “extend the Trump tax cuts would trigger one of the biggest tax hikes in American history.”
Further, the consequence of allowing the TCJA to expire would result in a massive tax increase and contribute to “reducing GDP by $1 trillion and destroying 6 million jobs.” As the committee argues, this is not only fiscally irresponsible but also disastrous for the economy. (RELATED: Renewing Trump Tax Cuts Crucial to America’s Economic Strength)
Another interesting dilemma is that both the budget hawks and the tax cutters are correct. The spending crisis must be addressed, and the TCJA must be extended or ideally made permanent. Lawmakers should also consider more pro-growth, broad-based relief, like lowering the corporate tax rate to 15 percent and flattening the brackets to ultimately a flat income tax.
This is possible and Republicans only need to rediscover their fiscal conservative heritage for guidance.
Presidents Warren G. Harding and Calvin Coolidge reduced tax rates and cut spending during the 1920s. The federal government was certainly different and much smaller than today, but Harding and Coolidge, along with their budget directors, had to fight for spending reductions.
Andrew Mellon, who served as secretary of the treasury and was the architect of the Harding and Coolidge tax cuts, believed that balancing budgets and limiting spending were just as important. George M. Humphrey, secretary of the treasury in President Dwight D. Eisenhower’s administration, was another budget hawk like Mellon. Humphrey understood the importance of lower tax rates, but he also warned about the consequences of uncontrolled spending which led to debt and inflation. “Deficits and the theft of inflation which results [from uncontrolled spending] should be avoided like the plague,” warned Humphrey.
“We must not cut taxes on borrowed money and so pass on more bills to our children and grandchildren,” stated Humphrey in 1956. Further, he argued that “a balanced budget is the first step toward another tax cut.”
Republicans should learn from the Harding and Coolidge administrations as well as Mellon and Humphrey that lowering tax rates is important but balancing the budget through more economic growth and less spending is crucial.
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John Hendrickson is the policy director for the Iowans for Tax Relief Foundation.
Vance Ginn is a visiting scholar with the Foundation and formerly served as the chief economist at the Office of Management and Budget during President Donald Trump’s first administration.
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