Trump's Financial Balancing Act: Tax Cuts and Spending Cuts
As President, Donald Trump has proposed an array of policies that encompass both substantial cuts and minor alterations. His agenda includes vast reductions in foreign aid, consumer protection, and healthcare spending, while simultaneously pursuing the elimination of the one-cent piece. Despite the seemingly disparate nature of these proposals, they share a common goal: funding tax cuts.
Tax cuts are a top priority for Trump, who seeks to extend existing tax cuts set to expire in 2025 and introduce new ones. However, these tax reductions require significant budget savings.
In 2017, Trump's previous tax cuts faced less resistance. The national debt stood at $20 trillion, with a public debt-to-GDP ratio of 74%. Congressional constraints on new debt accumulation and market concerns about a debt crisis were not prevalent then.
Today, the scenario has changed. The national debt has skyrocketed to $36 trillion, and the public debt-to-GDP ratio has approached 100%. This has raised market concerns about the size of the debt, reflected in rising long-term interest rates.
To offset the cost of his proposed tax cuts, Trump has enlisted "hatchet men" led by Elon Musk. Musk's strategy mimics his drastic cost-cutting measures at Twitter, where he slashed the workforce by over 75% and overhauled the business model.
This rapid government downsizing aligns with the techno-libertarian ideals of Trump supporters like Peter Thiel and Marc Andreessen. It also conveniently paves the way for additional tax cuts that Trump advocates for.
Trump's 2017 tax cuts for individuals expire this year. Extending them for 10 years would cost $4 trillion in lost revenue, increasing the national debt unless accompanied by spending cuts. The cost would be even higher if the tax cuts were made permanent.
Trump proposes several additional tax cuts, including eliminating taxes on tip income, overtime pay, and Social Security benefits. These would increase the debt by $1 trillion or more, depending on Congress's implementation.
Eliminating the penny would contribute minimal savings, with the Mint spending only $454 million annually on their production. However, Trump correctly points out that pennies are a financial liability, each costing 3.69 cents to produce.
Larger targets for savings include shutting down the US Agency for International Development, with an annual budget of $40 billion, and capping health research grants. Elon Musk's team is also searching federal agency budgets for cost-cutting opportunities. Musk aims to identify $500 billion in annual savings.
Trump also seeks additional tax revenue through tariffs. In 2024, the United States collected $83 billion from customs duties, which was less than 2% of total revenue. Trump aims to increase tariff revenue, incorrectly claiming that they are paid by foreign entities. He also proposes eliminating a tax break for investors, which would bring in $15 billion per year.
Many of Trump's plans require congressional approval, making them uncertain. While he can unilaterally eliminate the penny and levy tariffs, budget cuts are typically determined by Congress. It may also be illegal for Trump to withhold spending authorized by Congress.
Nevertheless, Musk's efficiency efforts may serve as a roadmap for congressional Republicans. While some Republicans support smaller government and lower taxes, others may be hesitant to cut services or benefits that their constituents rely on.
The implementation of libertarian ideals is being tested, and only time will tell its outcome.