Why Republicans Should Cut Spending To Extend Their Tax Cuts

Whither supply-side economics? Given debates since 2016 about the meaning of conservatism, those on the right might wish to assess whether and to what extent a philosophy that rose with Ronald Reagan remains relevant nearly half a century later.

The discussion seems particularly timely given that major portions of the 2017 Tax Cuts and Jobs Act will expire next year. The slowly developing debate over the tax bill reveals both the strengths and weaknesses of the supply-side approach: It can yield economic growth — but it gives politicians an excuse not to reduce government spending.

The ‘Laffer Curve’ and the ‘Trump Boom‘

Broadly speaking, supply-siders focus on increasing economic growth by optimizing tax rates. Put another way, rather than following the left’s obsession with the right way to divvy up the economic pie — which presupposes a zero-sum game in which some must lose for others to win — they focus on expanding the size of the pie, such that everyone, both individuals and the federal government, obtain a bigger slice.

The notion that lowering tax rates can yield more tax intake by generating new economic growth came via economist Arthur Laffer and his famous curve. Donald Trump’s 2017 tax package generally followed this blueprint, resulting in significant economic growth and rising incomes — particularly for women, members of ethnic minority groups, and foreign-born workers.

Of course, not all tax reductions result in the same amount of economic growth, nor do they all “pay for themselves” by generating revenue. If they did, the federal government could maximize its revenue by lowering tax rates to 1 percent. (Don’t hold your breath waiting for that to happen.) But the general concept remains solid: Properly targeted tax relief can benefit economic growth and offset declines in government revenues.

Supply Siders Ignore Spending

The problem with this philosophy comes not with what supply-siders are saying but with what they aren’t. By focusing solely on the revenue side of the equation as the way to generate economic growth, they give politicians a reason to ignore the other side of the ledger and maintain destructive levels of government spending.

Consider a recent Wall Street Journal op-ed by Mike Pence and Pat Toomey discussing the 2017 tax law. Most of the article discussed its positive effects, making the case for pro-growth policies in much the same way I did above, with more specific examples and data about the effects of the Trump policies. But the article’s concluding paragraph hit a disconcerting note for policy experts reading between the lines:

The [Tax Cuts and Jobs Act] was the most successful tax reform in at least 30 years. Ideally, Democrats would join with Republicans to make all of it permanent. If not, we’ll have to rely on a Republican sweep in November — and Republican unity next year — to extend it for as long as possible. (Emphasis added.)

To make the subtle wording more explicit: Pence and Toomey argue that either 1) a bipartisan coalition of lawmakers should make the law permanent, using 60 votes to overcome a Senate filibuster, or 2) assuming Republicans win unified control of Congress in November, they should pass an extension via budget reconciliation with 51 Senate Republican votes, even though reconciliation limits mean Republicans cannot make the law permanent, and will have to settle for “extend[ing] it for as long as possible.”

That is an entirely false premise. The procedures governing budget reconciliation only prohibit provisions that increase the long-term budget deficit. In other words, with unified party control next year, Republicans could permanently extend the 2017 Trump tax relief — if they cut spending to do so.

Not unsurprisingly, lawmakers are spoiled for choice when it comes to cutting spending. I have noted elsewhere that repealing all of the green energy pork included in the Democrat “stimulus” measures of the past few years, coupled with undoing various Biden administration regulatory actions, would save enough money to pay for most, if not all, of a permanent tax relief extension. Yet some Republican lawmakers are already backpedaling on the idea of repealing all of Biden’s green pork — which I’m sure has absolutely nothing to do with the fact that special interest groups also want to retain said subsidies and handouts.

Congress, Do Your Job!

Therein lies the problem with the supply-side argument: It absolves Republican lawmakers from exerting any fiscal restraint on the government spending that has left Americans with a mountain of deficits and debt.

Having worked for both Pence and Toomey when they served in Congress, I know they have generally good records on spending. For instance, both men opposed the creation of an unpaid-for prescription drug benefit back in 2003 — an incredibly tough vote against the leaders of their party, to demonstrate that lawmakers shouldn’t stick trillions of dollars in long-term spending on the nation’s credit card.

Given that history, both they and other pro-growth advocates should insist that lawmakers fund any extension of tax relief next year by reducing federal spending. Such efforts would first allow a Republican-controlled Congress to make such tax relief permanent, providing helpful certainty to businesses and individuals alike. Just as important, acting in this manner would force lawmakers to exercise a fiscal discipline they have abandoned for far too long.

Chris Jacobs is founder and CEO of Juniper Research Group, a policy consulting firm based in Washington, and author of the book “The Case Against Single Payer.” He appeared in the 1995 “Jeopardy!” Teen Tournament and is on Twitter: @chrisjacobsHC.