Trump's Tax Cuts: A Balancing Act of Trivial and Transformative Measures
President Donald Trump's early actions as the nation's leader have been a mixture of drastic and seemingly insignificant moves. While he aims to slash billions in foreign aid, consumer protection, and even healthcare, he also seeks to discontinue the production of pennies, a currency most Americans would hardly notice its absence.
These seemingly unrelated initiatives share a common undercurrent: the funding of tax cuts. Extending existing tax cuts set to expire in 2025 and introducing new ones is a top priority for Trump. However, this requires substantial budget savings in other areas.
Trump's previous tax cuts implemented in 2017 were enacted under more favorable circumstances. At the time, the national debt stood at approximately $20 trillion, with 74% held by the public as a percentage of GDP. While congressional limits on additional debt from new legislation were in place, concerns about a debt crisis were minimal.
Fast forward to today, the national debt has skyrocketed to $36 trillion, with the portion held by the public nearing 100% of GDP. Markets are signaling a growing unease with the excessive debt burden, reflected in rising long-term interest rates despite falling short-term rates. Some fiscally conservative Republicans in Congress have warned that additional tax cuts under Trump's leadership may be impossible without corresponding spending reductions.
Trump has enlisted a team led by Elon Musk, known as the "efficiency czar," to spearhead his cost-cutting agenda. Musk's tenure at Twitter, where he dramatically cut the workforce and upended the business model, serves as a blueprint for similar actions within the federal government.
This rapid government downsizing aligns with the techno-libertarian ethos espoused by Trump supporters like tech moguls Peter Thiel and Marc Andreessen. Conveniently, it also clears the path for the tax cuts championed by Trump.
The individual tax cuts signed by Trump in 2017 expire at the end of this year. Extending them for another decade would cost the government at least $4 trillion in foregone revenue, increasing the national debt if not offset by spending cuts. The cost would be even higher if the tax cuts become permanent.
Trump has proposed an additional dozen tax cuts, including pledges to eliminate taxes on tip income, overtime pay, and Social Security benefits. These cuts would add another $1 trillion to the debt, potentially more depending on their congressional structuring.
Thus, Trump requires significant spending cuts to offset these ambitious tax reductions. Abolishing the penny would yield minimal savings, as the mint spends around $454 million annually producing one-cent coins, representing only 0.00006% of federal spending. However, Trump's assertion that minting pennies is financially unsustainable is accurate, with each coin costing 3.69 cents to produce. Eliminating pennies in a cost-cutting drive would demonstrate Trump's commitment to fiscal responsibility.
More substantial savings could be achieved by targeting larger government agencies. Trump proposes closing the US Agency for International Development, with an annual budget of $40 billion. Capping health research grants could also save several billion dollars. Musk and his team are reportedly scrutinizing the budgets of every federal agency, seeking additional cuts. Musk's stated goal is to identify at least $500 billion in annual savings.
Increasing tax revenue is another aspect of Trump's strategy. Implementing a wide range of tariffs is a major component. In 2024, the United States collected $83 billion in customs duties, less than 2% of total revenue. Trump seeks to boost this revenue stream significantly, erroneously labeling these tariffs as taxes paid by non-residents. He has also expressed a willingness to eliminate a tax break for specific professional investors, potentially generating an additional $15 billion per year.
It's important to note that many of these plans require congressional authorization, making their implementation uncertain. Trump can unilaterally eliminate the penny and impose tariffs. However, reducing agency budgets falls under the authority of Congress, and withholding spending authorized by legislation may be unlawful. Numerous lawsuits have already been filed challenging Trump's executive orders, with more likely to follow.
Musk's efficiency efforts could inspire congressional Republicans to adopt a similar approach. Some may not require additional motivation, as reducing taxes and government size has been a Republican mantra for decades. However, there may be resistance from those who support the concept of a leaner government but are hesitant to cut services or benefits for their constituents. The libertarian experiment is ongoing, with the ultimate verdict still to be determined.