Donald Trump's Fiscal Policies: Budget Cuts and Tax Reductions
President Donald Trump's early actions involve both significant and minor initiatives. While proposing billions of dollars in cuts to foreign aid, consumer protection, and healthcare, he also aims to discontinue production of the penny, which may not be noticeable to most Americans.
Despite appearing disparate, these measures share a common goal: funding tax cuts. Extending current tax cuts expiring in 2025 and introducing new ones is a priority for Trump. However, this requires substantial budget savings elsewhere.
Trump's previous tax cuts in 2017 were more feasible. The national debt was $20 trillion, with the public holding 74% of GDP. While there were congressional limitations on adding to the debt, concerns about a debt crisis were minimal.
Today, the situation is different. The national debt has reached $36 trillion, with the public holding nearly 100% of GDP. Markets indicate that the debt is excessive, evident in rising long-term interest rates even as short-term rates decline. Republican budget hawks in Congress warn that Trump's new tax cuts cannot be implemented without major spending cuts.
Trump has appointed Elon Musk as efficiency czar, tasked with identifying areas for cost reductions. The model appears to be based on Musk's cost-cutting measures at Twitter, where he reduced payroll by over 75% in two years.
Such drastic government downsizing aligns with the vision of techno-libertarians like Peter Thiel and Marc Andreessen, who advocate for a smaller government and lower taxes. Notably, the tax cuts for individuals signed by Trump in 2017 expire this year. Extending them for a decade would cost the government $4 trillion, increasing the national debt if not offset by spending reductions.
Trump has also proposed additional tax cuts, including eliminating taxes on tip income, overtime pay, and Social Security benefits. These would further increase the debt by $1 trillion or more, depending on congressional implementation.
To finance these tax cuts, Trump seeks substantial spending cuts. Discontinuing penny production would yield minimal savings, as the mint spends only about $454 million annually on one-cent coins. However, Trump correctly notes that producing pennies is a net loss, with each penny costing 3.69 cents to produce. Eliminating them would symbolize his commitment to conserving taxpayer funds.
More significant savings are sought by Trump, including shutting down the US Agency for International Development, which has an annual budget of $40 billion. A cap on health research grants is also intended to save several billion dollars. Musk and his team are reportedly scrutinizing the budgets of all federal agencies.
Trump's plans also include generating new tax revenue. He supports a wide range of tariffs, which yielded $83 billion in 2024, less than 2% of total revenue. Trump aims for significantly more tariff revenue, inaccurately describing it as taxes paid by foreigners. He also intends to eliminate a tax break for certain investors, which could generate $15 billion annually.
However, many of these plans require congressional approval, making their implementation uncertain. Trump can unilaterally eliminate the penny and impose tariffs. Yet, budget cuts require congressional action, and Trump may be legally constrained from withholding spending authorized by Congress. Numerous lawsuits have already been filed challenging his executive orders, and more are likely.
Musk's efficiency efforts provide a template for congressional Republicans to pursue, if they choose. Low taxes and smaller government have been Republican goals for decades, but some may hesitate to cut services or benefits for their constituents. Thus, libertarianism is being tested, and the outcome remains to be determined.