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Will Trump II See the Return of Fiscal Conservatism?

Deficit hawks are again ascendant.

Credit: a katz

Since President Ronald Reagan rode the supply-side revolution to the White House, Republicans have been unified on tax policy. Tax cuts are good, big ones even better, and government revenue once reduced shall never be increased again—we solemnly swear. President George W. Bush’s top legislative priority upon taking office was a massive tax cut. President Donald Trump’s one legislative achievement in his two years when the GOP held both houses of Congress was another massive tax cut. 

The Trump tax cut, formally the Tax Cuts and Jobs Act of 2017 (TCJA), consisted mainly of temporary provisions that expire next year. The stage is thus set for a legislative “battle royale” that will turn in part on who the 2024 election installs in power at each end of Pennsylvania Avenue. But the long-standing conservative consensus is now teetering, and even if Republicans win the presidency and both houses of Congress, TCJA’s extension is no sure thing. 


In some reporting, making TCJA permanent and perhaps cutting taxes even further are top priorities for both Trump’s advisors and congressional leaders. But prominent House leaders like Rep. Tom Cole (R-OK), chair of the House Appropriations Committee, and Rep. Jodey Arrington (R-TX), chair of the House Budget Committee, have indicated they believe tax increases need to be on the table in pursuit of deficit reduction. According to Rep. Jason Smith (R-MO), chair of the House Ways & Means Committee, some colleagues even want to raise the corporate tax rate. Economists at the most established right-of-center institutions, like Kyle Pomerleau at the American Enterprise Institute and Brian Riedl at the Manhattan Institute, have endorsed Arrington’s sentiment.

What has changed since the initial passage of TCJA? First and foremost, the fiscal picture has deteriorated badly. In June 2017, the Congressional Budget Office (CBO) forecasted a deficit for the year equal to 3.6 percent of GDP, rising to a deficit of 5.2 percent of GDP ten years later. Interest rates were low and payments on the national debt amounted to only 1.4 percent of GDP, less than half the level of defense spending. Inflation had not been a problem in decades. Fast-forward to 2024, and last year’s deficit was already above 6 percent of GDP. Interest payments this year will exceed 3 percent of GDP, outpacing total defense spending.  

Second, TCJA was an expensive failure. A year after the law’s enactment, Kevin Hassett, chairman of the White House Council of Economic Advisers (CEA), delivered a presentation to the American Economic Association’s annual meeting in which he highlighted CEA’s key predictions and asserted that the economy had responded exactly as expected. Growth had increased, and business investment was playing an increasing role. But Hassett’s data was preliminary—and, it turned out later, inaccurate. When final numbers arrived, TCJA’s effect vanished. The economy had behaved as CEA would have expected if there had been no tax cut at all. In 2018, TCJA was expected to cost nearly $2 trillion over ten years in lower tax revenue and, as a result of higher deficits and debt, higher interest payments. The estimated cost now of repeating the exercise is nearly $5 trillion.

Third, the politics of taxes and spending has shifted. Republicans are no longer the party of high-income households and corporate interests. Rep. Chip Roy (R-TX), an outspoken leader in the traditionally anti-tax House Freedom Caucus, told Punchbowl last week, “There’s a lot of big corporations that have been taking a free ride on Republicans for a long time who need their ass kicked. And so I’m not going to be all that sympathetic when they roll in here saying… I demand we get carried interest loophole protection and we get our low corporate rate when I’m watching hardworking families struggle and these big corporations are shivving the American people with their bullshit policies.” Sen. Josh Hawley said “nothing should be ‘sacrosanct.’” [from Punchbowl Premium–The Vault, 5/26/2024]

Perhaps relatedly, Americans across the political spectrum appear to be less gung-ho on tax cuts than is commonly assumed. In a new poll conducted by American Compass in partnership with YouGov, 85 percent agreed that “the budget deficit is a serious problem and the nation must be willing to take even painful steps to solve it.” What should those painful steps be? Asked to allocate 100 points across deficit reduction via tax increases and via spending cuts, the median American chose a mix of 40 percent tax increases and 60 percent spending cuts. Even among Republicans, most wanted at least 25 percent of deficit reduction to come from tax increases and fewer than one-in-three wanted exclusively spending cuts. 


We could be seeing the return of the fiscal conservatives. Back in the 1980s, President Ronald Reagan signed five tax increases after his initial tax cut proved more costly than expected. But by 2011, Republican presidential candidates were all raising their hands in opposition to a hypothetical budget deal that would cut $10 of spending for every $1 of tax increases. A “pledge” they had signed never to raise taxes had replaced the national interest as their north star. The true cause of limited-government conservatism, which not only restrains spending, but also pays for the spending that does occur, had transmogrified into an anti-tax radicalism that offered the voters bread and circuses and sent the bill to their children.

The United States cannot afford for this to continue. It cannot afford further tax cuts. It cannot afford higher spending. And it cannot afford political parties clinging to absolutist positions that preclude any prospect of progress. 

Fortunately, the conservative tradition is otherwise, the preferences of the American people are otherwise, and politicians who can put two and two together have an obvious opportunity. Step one is tabling TCJA. Democrats are expecting Republicans to plead for its extension and are licking their chops for the concessions they might extract in return, which will only compound the folly. Anyone with an ounce of fiscal responsibility should instead arrive on Capitol Hill saying, “Actually, we’re good. What’s next?”  

What’s next is step two: sitting down with Democrats and finding a concrete deficit-reduction deal—not a blue-ribbon commission, or entitlement reform that may or may not happen decades hence, but actual spending cuts that can be achieved now, in return for which new revenue could indeed be on the table. This cannot be yet another game of tax increases today and spending cuts that never materialize. Returning again to the Reagan tradition, the model must be “trust, but verify,” securing specific, legislatively codified cuts, focused especially on bringing discretionary spending back to pre-Covid levels next year. 

Of course, the other side may say no. To date, Republicans signaling a willingness to get serious have been met only with silence from Democrats who seem increasingly incapable of contemplating any curbs on their untenable ambitions for the growth of government. But there is no prisoner’s dilemma here, with a choice to behave responsibly backfiring if the other side defects. If progressives will not be reasonable, calling their bluff clears the field for conservatives to advance their own preferred package unilaterally, while standing squarely in the middle of public opinion. 

A return to fiscal responsibility is the dominant strategy, as it has always been in American politics. Let’s not forget, in its first 225 years as a democratic republic, the United States of America spent within its means. As recently as 2000, the national debt stood below 33% of GDP and the budget was in its third consecutive year of surplus. Both voters and politicians understood that this was in the nation’s interest and their own.

When conservatives led in that way, they were much more successful politically, wielded more power and thus achieved more of their priorities, limited the growth of government more effectively, and as a result better served the nation. When tax cuts became the end unto themselves, we soon forgot why we cared about them to begin with, and then that we cared about anything else, and that has gone less well.