People should be concerned about big tax cuts. Courtesy | Wikimedia Commons

Former President Bill Clinton declared twice in his 1996 State of the Union address that “the era of big government is over.” The last 25 years have shown that was far from the truth. 

According to the White House Office of Management and Budget, federal spending as a percentage of GDP has gone from 18% in 2000 to 31% by 2020. Even more concerning, in 2000, the federal government ran a budget surplus of $236 billion—that is, more tax money coming in than being spent. Today, our annual deficits regularly exceed $1 trillion, reaching an all-time high of $3.1 trillion during former President Donald Trump’s final year in office. Now, the total amount of money our federal government owes is more than the entire economic output of the nation. The cause is clear: it is not the debt ceiling, which will soon be debated, but rather our out-of-control spending and appropriations unmatched by tax increases. 

To be concerned about government spending is not right-wing libertarian fanaticism. President Joe Biden’s Treasury Department reports that “current policy is not sustainable and must ultimately change.” Just last week, the Biden Social Security Administration announced that its trust fund will be completely drained a year earlier than expected by 2034. Once that happens, social security benefits will either face dramatic cuts or start coming out of the federal government’s general fund. 

Even a great friend of the national debt, Alexander Hamilton, said that “the creation of debt should always be accompanied with the means of extinguishment.” Today, there is no means for extinguishment in sight.

How we got to our present situation is best highlighted by Nobel Laureate James M. Buchanan and Richard E. Wagner in their 1977 book “Democracy in Deficit: The Political Legacy of Lord Keynes.” They write that “debt financing reduces the perceived price of publicly provided goods and services. In response, citizens-taxpayers increase their demands for such goods and services. Preferred budget levels will be higher, and these preferences will be sensed by politicians and translated into political outcomes.”

Because people are not feeling the cost of all the government is providing, they keep demanding more.

This phenomenon is reflected in a March 2023 Associated Press poll. While 60% of respondents said the government spends too much, when it came to specific line items, people thought the government needed to spend more. More than 62% of respondents said that the government should spend more on education, health care, and social security. Fifty-eight percent said we need more funding for Medicare. Fifty-three percent want more funding for border security. The issue is that people do not anticipate their taxes will have to rise if they want to pay for these things. Why would they? Spending has increased, while tax rates have decreased in recent decades.

Many were strongly critical when Republicans pondered changes to Social Security and Medicare. Yet, the fact remains that both programs have shortfalls adding up to more than $100 trillion over the next 30 years and face insolvency within the next decade.

Manhattan Institute Senior Fellow and economist Brian Riedl crunches these numbers and has found that not a single tax proposal, even the radical tax hikes proposed by Democrats, would get us close to balancing social security and Medicare. He wrote in February that the suggestion “that full benefits can be paid without raising taxes for 98 percent of families has no basis in mathematical reality.”

The mere program deficits can only be addressed with the largest tax hike since World War II, Riedl said, and that does not account for the rest of government spending.

The old talking points about Laffer Curve—the theory popularized in the 1980s that tax cuts could increase revenues—are simply not going to cut it. There is a point where tax cuts result in decreased revenue.

As we are currently headed for a debt ceiling debate, the fundamental issue of budgetary appropriations is obscured. The debt ceiling asks whether we will fund what Congress has already budgeted. Policy analysts on both sides of the aisle admit the massive problem if Congress does not raise the debt ceiling. We simply do not have enough funds to pay for everything. What will we do if we cannot borrow? It is the budget that must be made reasonable. 

Unless we increase revenue, the debt will only increase. It’s not possible to balance the budget without raising taxes on most Americans, especially if Medicare and Social Security benefits remain constant. Non-partisan think tank, the Committee for a Responsible Federal Budget, correctly notes that it is unlikely we will be able to balance the budget within 10 years. Nonetheless, we must work to at least reduce deficits and close the gap as much as possible.

The era of big tax cuts is over… or at least it should be. We are headed for a crisis unless action is taken. We are approaching the end of what Riedl has branded the era of “free lunch economics.” Americans are in for a rude awakening either of extraordinary tax increases and the disappearance of their beloved entitlement programs or the economic calamity of a government unable to pay its bills at all—or choosing hyperinflation over defaulting on loans. Stop ignoring the problem. We must get serious about reforming both tax and spending like our livelihoods depend upon it… because they very well might.