Debt Digest | Cut Spending to Boost Growth

Links & Fiscal Facts

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

• Smart spending cuts will boost growth. Cato’s Adam Michel explains a recent CBO estimate that shows extending only the individual provisions of the 2017 Trump tax cuts would boost the economy, but the drag of increased government debt would outweigh the benefits over time. However, the CBO shows that pairing individual tax cuts with business tax cut extensions would drive economic growth despite the effects of a larger national debt. Summarizing the CBO result, he writes: “[T]he entire 2017 tax cuts would boost GDP by roughly 0.3 percent in 2034.” Michel emphasizes that even larger economic gains are possible if Congress pairs tax cuts with spending cuts. He concludes: “[S]ignaling fiscal discipline to markets is its own supply-side tax cut that would turbocharge other policies like full expensing, lower business tax rates, and deregulation.” Read 14 spending cut recommendations from Michel and Cato’s Chris Edwards that would cut $4.8 trillion over 10 years here.

• House Budget Chair calls for spending cuts to unleash economic growth. House Budget Committee Chair Jodey Arrington (R-TX) writes in a Washington Examiner op-ed: “If Democratic spending triggered record inflation, interest rate hikes, and economic malaise, then reining in wasteful government spending is the first step to stabilizing prices, spurring economic growth, and unlocking opportunity and future prosperity for all Americans. Republicans now have a historic opportunity to reverse the recent fiscal disaster by reducing spending in the budget process.” As Dominik Lett and I’ve noted, the 119th Congress and the Trump administration must use upcoming fiscal deadlines to set America on a sustainable fiscal path. To achieve this goal, Congress should address entitlement spending, where a BRAC-like fiscal commission could help. Rep. Arrington, when asked about my proposal of a fail-safe congressional fiscal commission, said: “[T]he problem with Congress is ‘not a list of ideas on how to fix the problem, it's the political courage to execute on those ideas.’”

• US taxes are the most progressive in the OECD. The Manhattan Institute’s Brian Riedl highlights that the United States has the most progressive income and payroll taxes among OECD nations (see figure below). The US progressivity ratio for the top decile of taxpayers—measuring their share of taxes paid relative to their share of pre-tax income—is 1.35, compared to the OECD average of 1.11. Notably, this analysis excludes value-added taxes (VAT), which would make other countries’ tax codes less progressive. Adam Michel explains that VAT, applied at the same rates to all taxpayers, is why European governments are bigger and collect more revenue. As I noted in my recent testimony before the House Budget Committee, responding to Rep. Glenn Grothman (R-WI): “[M]ost European countries tax their middle-class taxpayers at much higher rates, often through value-added tax (VAT). [...] If we’re talking about relying solely on revenue increases to close our fiscal gap, we need to be honest with the American people: this would require steep tax hikes on the middle class.”

  

• Free the Postal Service. The Washington Post reports that President-elect Donald Trump has expressed interest in privatizing the United States Postal Service (USPS). “The Postal Service lost $9.5 billion in the fiscal year ending Sept. 30, stung by continued declines in mail volume and a slower-than-anticipated parcel shipping business, even as it made major new investments in modernized facilities and equipment. The agency faces nearly $80 billion in liabilities, according to its annual financial report,” writes the Post. Alongside David Ditch, James Gattuso (RIP), and Rachel Greszler, I’ve argued that Congress should end the universal service obligation (USO), which gives the USPS requirements like six-day-a-week delivery that result in unnecessarily high costs. In addition, Congress should eliminate USPS’ monopolies over letter mail delivery and exclusive access to mailboxes. These reforms would enable Congress to privatize the Postal Service.

• A lack of inhibitions could be what DOGE needs. Niskanen Center’s Jennifer Pahlka, who helped start the US digital service—which assists federal agencies in improving their digital services—describes how efforts to improve government services are often stalled by claims of illegality. These claims, she explains, typically stem from outdated memos (not actual law) or from fear of trying new methods. In rare cases, certain actions are indeed illegal—but only because of unintended consequences of legislation caused by misunderstandings from lawmakers. Reflecting on the Department of Government Efficiency (DOGE), she writes: ”Diagnosis we have. The power to change we do not. Billionaires are in charge now because they have power. Elon in particular has what Ezra Klein correctly ascribed to Trump, which is lack of inhibition. Normal people like me get scared and ashamed when we’re told we’re doing something illegal. Elon does not. I wish it were different, but perhaps the job of breaking the wall has ended up with someone who is suited to doing it.” Read how Congress can further empower Musk-Ramaswamy DOGE here.