Debt Digest | Americans Will Bear the Cost of the Trump Tariffs

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• Means-tested programs are not the primary drivers of US fiscal challenges. Ben Ritz, the Vice President of Policy Development for the Progressive Policy Institute, responds to a recent Wall Street Journal op-ed by House Budget Committee Chairman Jodey Arrington (R-TX) and former Senator Phil Gramm (R-TX), in which the authors argue that means-tested programs like Medicaid and food stamps are the main drivers of US fiscal issues. Ritz critiques their comparison of total welfare spending to only the general revenue-financed portions of Medicare and Social Security, arguing: “That income taxes are considered general revenue while payroll taxes aren’t is a political distinction, not a mathematical one. And the math is clear: in 2024, Medicare and Social Security together will cost taxpayers nearly 70% more than all means-tested programs combined.” Furthermore, Ritz explains that even focusing on the general-revenue funded parts of Medicare and Social Security, these costs have outpaced welfare spending growth every year since 2001, except for the Great Recession and COVID-19 (see the figure below). “In 20 years, annual general-revenue support for Medicare and Social Security will exceed total projected spending on means-tested welfare programs,” adds Ritz. As we’ve covered in the previous edition of Debt Digest, the growth in healthcare and Social Security spending, not welfare programs, is ‘eating the budget’.

  

• A government efficiency commission could reduce wasteful spending. Mercatus Center’s Veronique de Rugy discusses the potential merits of a government efficiency commission led by Elon Musk, an idea proposed by former President Donald Trump, who suggested that this commission would focus on eliminating fraud and improper payments. As we’ve covered in a previous Digest, improper payments amounted to $236 billion in 2023, with Medicare, Medicaid, and Social Security responsible for $144 billion. De Rugy argues that beyond fraudulent and improper payments, the government spends hundreds of billions on inefficient programs that do not achieve their stated goals. She cautions, however, that “Programs that shouldn't exist have strong political backing, either because they serve a particular constituency or because they benefit powerful interest groups.” But as she concludes: “Cutting government spending is hard work. So is sending people into space. Musk does the latter better than NASA, so he might be up for tackling the former.”

• Americans will bear the cost of the Trump tariffs. Former President Donald Trump pledged to introduce additional tariffs on foreign goods if reelected, claiming that a tariff is a tax on other countries and has no impact on the United States. However, Cato’s Clark Packard, Scott Lincicome, and Alfredo Carrillo Obregon argue otherwise, stating: “Despite the former president’s claims to the contrary, however, there is overwhelming evidence that Americans bore the brunt of his tariffs—and would do so again if he is reelected and fulfills his campaign pledge to impose more aggressive protectionism.” Furthermore, Adam Michel explains that Trump’s tariffs undermined the positive effects of the Tax Cuts and Jobs Act (TCJA). He writes: “The Tax Foundation found that Trump’s tariffs on steel, aluminum, and China eroded about 12 percent of the total long‐​run impact of the TCJA before factoring in other trade actions, retaliatory tariffs, and broader trade policy uncertainty.”

• Fiscal responsibility requires pairing tax cuts with corresponding spending reductions. CQ Roll Call reports that Senator Mike Crapo (R-ID), the Ranking Member of the Senate Finance Committee, would support scoring the extension of the TCJA based on the “current policy” baseline, which assumes that expiring tax cuts will be extended. Using this approach, GOP lawmakers would sidestep the $4 trillion price tag attached to the TCJA extension under the “current law” baseline. While I’ve also suggested that the Congressional Budget Office (CBO) should include a more realistic baseline (“the current policy” baseline) when producing its legislative cost estimates, legislators shouldn’t be able to pick and choose which baseline to use depending on what outcome they are trying to achieve. Using a ‘current law’ baseline to score the original tax law (which disguised long-term revenue implications by assuming temporary tax cuts would expire as scheduled) and then switching to a ‘current policy’ baseline when extending current tax cuts so as to hide their deficit impact is fiscal hypocrisy of the highest order. As I’ve noted, “Including a realistic baseline among current cost estimates would expose Congress's reliance on gimmicky offsets [in the TCJA case, adopting temporary tax cuts so as to lower the bill’s deficit score].” Crapo also claims that “‘pro-growth’ tax policies [...] don’t need to be paid for.” The emphasis on pro-growth changes will be critical, but as Cato’s Adam Michel warns, “Without spending cuts, lowering federal revenue is fiscally irresponsible, as current deficits are already economically unsustainable.” He further suggests that if Congress is unwilling to adopt spending cuts, the TCJA extension and broader tax cuts should be revenue-neutral (pairing tax cuts with tax base reforms).

• Raise the retirement age. Tiana Lowe Doescher, writing for The Washington Examiner, argues for raising the retirement age, noting: “When Social Security was established in 1935, the retirement age was set at 65, the same age as today. But average American life expectancy, even after the COVID-19 pandemic and self-inflicted ‘deaths of despair,’ is up 23% from 1940. Even so, the full retirement age for those born after 1959 is just 67.” According to Doescher, raising the retirement age could have important health benefits, citing studies that link delayed retirement to longer lifespans. She also highlights the negative economic impacts of avoiding broader entitlement reforms: “[T]he refusal to reform these programs [Medicare and Social Security] directly translates into higher inflation and, thus, persistently higher interest rates, which, in turn, fuel each other. That means young workers struggling to afford family formation and home ownership are further penalized to fund the wealthiest generation in human history.” As we’ve written before, among other reforms, Social Security’s eligibility age should be increased and indexed to average life expectancy.