President Trump has fended off Republican criticisms of his “big, beautiful [budget] bill” by declaring that a vote against it is a vote for “the biggest tax increase” in American history, an estimated $4 trillion over a decade. The hidden irony is that, as the late Milton Friedman warned a half century ago, even if 2017 tax rates do not lapse, the “big, beautiful bill” will raise the country’s “true taxes.” Why? The bill includes substantial increases in federal deficit spending, which will be a drag on economic growth that would otherwise have been gr eater because of his tax-rate reductions and deregulation policies.
Passage of the Bill Is Tenuous at Best
Congressional passage of Trump’s bill is tenuous. Republicans have a three-vote majority in the Senate, and Senator Rand Paul (R-KY), and maybe two or three Senate-deficit hawks, could vote against the bill because it adds another $320 billion to federal spending this fiscal year.
Paul’s major complaint, however, is that Trump’s budget will hike the federal deficit for fiscal 2025 to $2.2 trillion and will add $22 trillion to the national debt over ten years, raising it to $59 trillion in 2035 from its current level of $36 trillion. Understandably, Paul fears that deficit spending already represents an “existential threat” to the country’s solvency, and Trump’s bloated “beautiful bill” will magnify that problem.
Passage of the bill has been made more even precarious because of the feud between Trump and his once cost-cutting ally Elon Musk. Musk has declared the bill to be “pork-filled” and a “disgusting abomination.” Trump has countered by warning Paul that the “GREAT people of Kentucky will never forgive him!” for any resulting tax increase.
Milton Friedman’s Fiscal Wisdom
Pundits in Congress and the media have failed to remember the wisdom of Nobel Prize-winning economist Milton Friedman (1912-2006), especially on policies that enlarge federal government powers and economic influence. Friedman’s fiscal points have been repeated by an army of economists over the last half century, but the administration’s advisors and the public obviously have missed Friedman’s insights. (Click here, here, and here.)
In straightforward language, Friedman explained to his audience (with prescience) in 1977 how wrongheaded an overstuffed budget bill is and why it will not “Make America Great Again.” .
Of course, Friedman understood that taxes are important, mainly because they, along with deficit spending, finance government expenditures and, in the process, distribute the economic burden of those expenditures among taxpayers. By way of tax-rate changes, taxes affect people’s incentives to work, save, and invest, which affect government revenues and expenditures and can also affect the demand for government programs.
However, taxes are not the most direct (or chief) source of the economic cost of government, as Friedman stressed. Government expenditures draw the country’s resources away from private sector uses (just as taxes do). Government expenditures will necessarily crowd out private expenditures by reducing the supplies of private goods and services and by raising their prices. Federal deficits used to finance added expenditures can do much the same, by absorbing private loanable funds and driving up interest rates, thereby reducing private investment.
Friedman understandably admonished his followers to do what (aggregate demand-side) Keynesians of the 1970s and before had denied was consequential: “Keep your eye on one thing and one thing only: how much government is spending. Because that’s the true tax. If you’re not paying for it in the form of explicit taxes, you’re paying for it in the form of inflation or borrowing.”
Concluding Comments
By proposing a budget “deal” that prevents a return of 2016 tax rates and adds hundreds of billions in federal expenditures, Trump imagines he adheres to conservative fiscal principles, not aware that he has proposed a “true tax” increase. Freidman warned that added government spending could reduce personal freedom and increase governments’ drag on private sector growth—impairing the potential growth effects of proposed tax-rate reductions and deregulation efforts, also included in the “beautiful bill.”
The lesson to be drawn from Friedman’s fiscal perspective? The administration has boasted that his bill will rejuvenate the economy. The reality is that contrary to Friedman’s admonition, they have diverted voter attention from the “one thing, and only one thing” that he (Friedman) saw as crucial for properly assessing fiscal policy: government expenditures as a percent of GDP. Given Trump’s “beautiful bill” will raise federal spending in 2035 to at least 24 percent of GDP from 23.1 percent this year (and 20.6 percent in 2019, before COVID)—from Friedman’s fiscal perspective, this is hardly a way to “Make America Great Again.”
Richard McKenzie is an economics professor emeritus in the Merage Business School at the University of California, Irvine and author of, most recently, Reality Is Tricky and Rationality Evolved.
