Tripping Through the Triangular Tax Tango

Budget reality is finally catching up with Republicans in Congress

The tax trainwreck that was obviously coming is now upon us. In the wee hours of Sunday night, the House Budget Committee frantically reconvened to advance the proposal that it had voted down on Friday. The proposal had not been improved, nor were the members who had blocked it now in support. Rather, as Congressman Chip Roy explained on Twitter:

Tonight, after a great deal of work and engagement over the weekend, the Budget Committee advanced a reconciliation bill that lays the foundation for much needed tax relief, border security, and important spending reductions and reforms. … We can and must do better before we pass the final product. As such, I joined with 3 of my colleagues to vote “present” out of respect for the Republican Conference and the President to move the bill forward. It gives us the opportunity to work together this week to get the job done in light of the fact our bond rating was dropped yet again due to historic fiscal mismanagement by both parties.

One need not be an expert in congressional procedure to discern that all this represents a futile kicking of the can down the road. The participants quite clearly cannot come to agreement but continue to postpone any reckoning with that reality. Congressman Roy’s warning that the bill “increases the likelihood of continuing deficits” is entirely accurate but has the awkward caveat that his own preferred framework, with steeper spending cuts that still come nowhere close to offsetting the proposed tax cuts, also increases the likelihood of continuing—and, indeed, growing—deficits. As of this writing, bond yields have surged higher than their peaks in the chaotic days after President Trump’s “Liberation Day” tariff announcements, and the 30-year Treasury has cracked 5% for the first time, a couple of blips aside, since before the Great Recession in 2007.

The very simple and unavoidable problem here is that Republicans have staked their reputation and agenda on the vague notion that they should cut taxes, but doing so would conflict with their conservative principles, undermine their economic goals, and harm them politically. Each attempt to solve one of these problems merely worsens another; addressing one faction’s merely alienates another. The result is that party leadership is running around in circles or, more precisely, triangles.

The initial plan was a clean extension of the 2017 Tax Cuts and Jobs Act (TCJA), at a cost of roughly $5 trillion. The deficit hawks of the House Freedom Caucus demanded trillions in spending cuts, which the House Budget Committee dutifully included. But slashing Medicaid spending to pay for upper-income tax cuts is a non-starter for both moderates and populists in the Senate. Thus the aggressive floating of tax-increase trial balloons.

Both President Trump and Secretary Bessent put forward the idea of allowing rates on the highest-income households to rise, which was met with interest by some Senators. But the prospect was a non-starter with others, leaving the GOP no closer to a framework that could pass. While the willingness to put higher taxes on the table was itself a dramatic departure from Republican orthodoxy, the idea fell quickly by the wayside once everyone saw that it would not solve the problem. A lot of Republicans are now open to raising taxes if it achieves their goals, but none have an interest in adopting the position and accomplishing nothing.

Perhaps the spending could be moderated instead? The Senate has tried floating a budget framework with just $3 billion (with a b) in cuts. But the fiscal hawks will not support that. To the contrary, “there’s emerging unity on the right in favor of boosting the bill’s spending cuts beyond the current $1.5 trillion level,” reports Semafor, “which doesn’t exactly help GOP leaders.”

Party leadership has already led members through this triangular tango at least twice. Start at the top, with a clean extension? No, that’s too big a deficit impact. How about we add some big spending cuts? No, that leaves us cutting benefits to cut taxes for the rich. How about if we also let the top rate rise? No, that violates your tax pledge. Let’s go back to the clean extension, but maybe call the tax cuts temporary to make the cost look smaller? The latest Budget Committee gambit, with some members voting “present” in return for an unspecified promise that greater spending cuts will be found somewhere, marks the start of a third go-round.

The equation has no solution, for the simple reason that extending most of the TCJA is a bad idea and the lawmakers know it. The policymaking process has felt more like a prolonged death march than an impassioned and enthusiastic push for reform because the legislators lack even the semblance of a coherent argument for what they’re attempting to deliver, beyond sheer inertia. I’ve written previously about the political folly of wasting this year of unified Republican control in this way, but it’s worth also saying a bit more about the substantive dead end.

Everyone agrees that the size of the federal budget deficit, now approaching $2 trillion, is a serious problem. Half of that amount is driven by the already accumulated debt, on which the government must now pay nearly $1 trillion of interest each year, and so we have entered the vicious cycle in which the interest payments on existing debt drive higher debt and thus higher interest payments, with the worsening fiscal picture leading to higher interest rates, causing the cycle to accelerate. Within ten years, even if TCJA is allowed to expire entirely, the Congressional Budget Office anticipates an annual $2.6 trillion deficit with $1.7 trillion of interest payments.

The House’s latest TCJA extension proposal attempts to mask its full impact with the gimmick of making many of the tax cuts expire in 2028. Of course, no one believes that the insistence on extension now would give way to an acceptance of expiration a few years hence. No, we would hear then, from the very people suggesting the “temporary” gimmick now, that anything less than further extension would represent an unacceptable tax increase. The Committee for a Responsible Federal Budget estimates that the full cost of the House’s provisions, if assumed to be permanent, would exceed $5 trillion in the next ten years. In 2034, the deficit would be $3.3 trillion and interest costs, accounting for likely higher interest rates, would exceed $2 trillion.

If we were to at least try and make out a defense of so absurdly irresponsible and unconservative a budget, we would need to consider four arguments, none of which is the least bit true.

1. “We have a spending problem, not a revenue problem.”

In 2025, the federal government will collect 17.1% of GDP in taxes, the argument goes. That’s not much different from the 17.3% average of the past 50 years. If TCJA expires, expected tax revenue would rise all the way to 18%, far above the previous average. By contrast, spending this year at 23.3% of GDP is much further above the 50-year average of 21.1%. The path to a responsible budget, then, is holding the line on low taxes and getting spending back down.

The problem with this argument is two-fold. First, it assumes that the federal government can plausibly maintain spending at the historical average despite trends like demographic changes and rising health care costs that have driven spending higher, even holding program parameters constant. Those programs are overwhelmingly popular.

Second, the 50-year analysis conflates two periods: the one up until the year 2000 when we maintained responsible fiscal policy, and the one after 2000 when deficits exploded. From 1975 until 2000, tax revenue averaged 17.9% of GDP while spending averaged 20.6% of GDP. That average deficit of 2.7% of GDP, in an era when GDP growth was strong, led to a low and manageable debt burden.

From 2001 to 2025, by contrast, revenue has averaged 16.7% of GDP while spending has averaged 21.7%. That 5% average deficit, in an era when GDP growth has been much lower (despite all those tax cuts!), has meant that debt has grown much faster than the economy, and the burden has become unsustainable. This is not a model we should be holding out as the standard to meet.

If our goal is sustainable budgets, of the kind we had prior to the year 2000, then yes, we have a spending problem, but we also have a revenue problem. Indeed, revenue levels with the expiration of TCJA would be much closer to the appropriate historical benchmark. If we want to pay down some of the unsustainable debt burden we have accumulated in the past 25 years, we’ll need to raise revenue and cut spending further. If we want to preserve a higher level of federal spending than was the case a generation ago, given an aging population and a more expensive health care system, we’ll need to raise revenue even more.

The tax rates codified by TCJA have not led to a sustainable budget at any time in modern history, and there is no spending plan on the table that would make the TCJA rates plausible going forward.

2. “We can grow our way out.”

Of course, if keeping tax rates were the key to driving higher economic growth, then perhaps with sufficient tax cuts we would generate sufficient growth to somehow solve the problem. Conversely, allowing rates to rise might make the problem worse. Unfortunately, that’s not the case.

As I have shown previously, neither TCJA nor the Bush tax cuts of the early 2000s can be credited with any positive effect on growth, by the measures put forward by the White House Council of Economic Advisers. “For the headline things that we model with real science, if you say the tax cuts aren’t working then you’re kind of in some kind of denial that you should think about,” said CEA chair Kevin Hassett at the 2019 American Economic Association annual conference. “Or you should show me some evidence and test my understanding because maybe there’s something I’m missing.” The thing that Hassett was missing was the final, revised data for the charts he was displaying. Use that data, and the tax cuts generated no growth whatsoever.

One reason that tax cuts are failing to deliver growth—and that a TCJA extension would likely fail too—is that tax cuts financed by larger deficits can discourage rather than encourage investment. As the Brookings Institution’s William Gale and Andrew Samwick observed in 2016:

It is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy in the long run. … The historical evidence and simulation analyses suggest that tax cuts that are financed by debt for an extended period of time will have little positive impact on long-term growth and could reduce growth.

Another problem is that the effects of cutting marginal tax rates at current levels pale in comparison to the effects achieved in the 1980s. This is easiest to see by flipping the relevant figure from “marginal tax rate” to “marginal keep your own money rate,” which is the metric most relevant to the incentives that people face.

When the top marginal tax rate is 70%, you keep only 30% of your next dollar earned. So, $100 earned delivers you $30. Cut that rate to 50%, as President Reagan’s 1981 tax reform did, and you keep $50 instead. That increase, from $30 to $50, is a 67% boost in return. Cut the tax rate from 50% to 28%, as President Reagan’s 1986 reform did, and the money you keep rises from $50 to $72, a 44% boost in return. But cut the rate from 39.6% to 37%, as President Trump did with TCJA, and you’ve boosted the return only from $60.40 to $63, or 4.3%. The effect is more than an order of magnitude below that achieved in the 1980s.

The United States desperately needs pro-growth policies—certain provisions in TCJA pertaining to business investment even qualify, and would ideally be made permanent. But broadly speaking, tax rates are not what is hampering growth and tax cuts will not unlock anything. Fiscal responsibility, lower deficits and less borrowing, investments in reindustrialization and workforce development, all would accomplish much more.

3. “Tax cuts pay for themselves.”

Credit where due, Republicans in Congress are not even trying to argue this anymore. Thank goodness. But it is the resulting question of how are you going to pay for this, if not with fairy dust, that has left them with no good options.

4. “Starve the beast.”

A deeply foolish theory that has gained traction on the American Right holds that deficits are useful in bringing down spending. Raise enough revenue to actually pay for the government we have, the thinking goes, and politicians will just turn around and spend even more. But cut revenue to the brink of insolvency and politicians will have no choice but to cut spending too.

Note first that this is deeply unconservative and had no place in the Republican political tradition. When President Reagan found that his 1981 tax cuts were generating less revenue than had been expected, he went on to raise taxes five times. President George H. W. Bush raised taxes as well. But note second, this does not actually make sense in theory, and note third that it has not worked in practice.

William Niskanen, adviser to Reagan and longtime chairman of the libertarian Cato Institute, has made both points well. On the theory:

The demand for federal spending by current voters declines with the amount of this spending that is financed by current taxes. Future voters will bear the burden of any resulting deficit but are not effectively represented by those making the current fiscal choices. One implication of this relation is that a tax increase may be the most effective policy to reduce the relative level of federal spending.

And on the evidence:

This position is not consistent with the evidence, at least beginning in 1981. In a professional paper published in 2002, I presented evidence that the relative level of federal spending over the period 1981 through 2000 was coincident with the relative level of the federal tax burden in the opposite direction; in other words, there was a strong negative relation between the relative level of federal spending and tax revenues.

Those same trends have held over the past couple of decades. The Bush and Trump tax cuts were followed by increases in spending, while the period after some of the Bush cuts were allowed to expire in 2013 saw the greatest spending discipline. The Wall Street Journal’s editorial board inadvertently makes the point especially obvious: “The current budget is a rare, maybe once in a generation, chance for a significant Medicaid policy victory.” Who possibly believes that the middle of a budget fight over whether to extend large tax cuts for high-income households is the “rare, maybe once in a generation, chance” to cut Medicaid? What possible political context could be worse?

The Trump administration has been willing to take extraordinary political risk in pursuit of its trade agenda, and brought the Republican Party’s entire congressional conference along for the ride. It would be peculiar if the tax issue proved the bridge too far. If ever there were a hard choice with huge political upside that requires only a willingness to abandon outdated orthodoxy, a more balanced tax package would seem to be it. And if ever there were a political figure who relished such choices…

If I made a mistake back in February, describing all this as “The Tax Trainwreck Everyone Sees Coming,” it was only in privileging my love of trains over my general commitment to nautical metaphors. Senator Ron Johnson, the Wisconsin Republican known generally for aggressive efforts to cut taxes and spending, has it right in likening the ongoing effort to the Titanic—and not in the sense that it too was big and beautiful.

- Oren