Donald Trump's Tax Cuts and Spending Cuts: A Path to Fiscal Stability or a Risky Gamble?

President Donald Trump's early actions have sparked a wide range of reactions, from profound to trivial. On one hand, he proposes deep cuts to foreign aid, consumer protection, and healthcare spending. On the other, he seeks to eliminate the unpopular penny.

Beyond these seemingly disparate measures, a unifying thread emerges: financing tax cuts. Trump's top priority is extending tax cuts set to expire in 2025 while introducing new ones. This ambitious plan necessitates substantial budget savings elsewhere.

The National Debt Conundrum

Trump's previous tax cuts in 2017 were more feasible, with the national debt around $20 trillion and the publicly held portion at 74% of GDP. However, the situation has dramatically shifted. The national debt has now ballooned to $36 trillion, and the publicly held portion is approaching 100% of GDP.

Financial markets are signaling concern over the mounting debt, evidenced by rising long-term interest rates despite falling short-term rates. Republican budget hawks in Congress warn that Trump's new tax cuts require significant spending cuts to balance the budget.

Elon Musk's Influence on Government Downsizing

Trump has assembled a team of efficiency experts led by Tesla CEO Elon Musk, whose cost-cutting spree at Twitter has served as a model. Within two years, Musk reduced Twitter's payroll by over 75% and restructured the business.

Such a rapid downsizing of government would align with the techno-libertarian vision espoused by Trump supporters like Peter Thiel and Marc Andreessen. Conveniently, it would also make way for the tax cuts Trump champions.

Tax Cuts and Spending Reductions

Trump's individual tax cuts signed in 2017 expire this year. Extending them for another decade would cost the government at least $4 trillion, adding to the national debt unless accompanied by spending cuts. Permanency would further increase the cost.

Additionally, Trump proposes eliminating taxes on tip income, overtime pay, and Social Security benefits. These cuts could add another $1 trillion to the debt.

Identifying Spending Cuts

Trump faces the challenge of identifying sufficient spending cuts to offset his proposed tax cuts. While eliminating the penny would save a negligible amount, larger targets like the US Agency for International Development (annual budget: $40 billion) are under consideration. Musk's team is reportedly scrutinizing federal agency budgets for potential savings, aiming for $500 billion in annual cuts.

Additional Revenue Sources

Trump is also exploring new revenue streams through tariffs. In 2024, customs duties generated $83 billion, less than 2% of total revenue. Trump aims to significantly increase tariff revenue, inaccurately framing it as taxes paid by foreigners. He has also proposed eliminating a tax break for professional investors, potentially yielding $15 billion annually.

Congressional Challenges

Many of Trump's plans require congressional approval, complicating their implementation. While Trump can unilaterally eliminate the penny or impose tariffs, budget cuts may require legislative action. Trump's potential withholding of spending authorized by Congress could face legal challenges.

Libertarianism on Trial

Musk's efficiency efforts are potentially inspiring a similar approach among congressional Republicans. However, some Republicans may resist extreme government downsizing, balancing theoretical support for smaller government with concerns about constituent services.

The full impact of Trump's fiscal policies remains uncertain. His tax cuts and spending reduction efforts are ambitious and controversial, with potential implications for the national debt, government services, and the economy as a whole.