Stop Saying We Need to “Pay for the Tax Cuts.” We Need to Pay for the Spending, Not Tax Cuts

Government promises must go back in alignment with what people really want

Few talking points in Washington are more misguided than the demand that we must “pay for the tax cuts” or that “we don’t need to pay for tax cuts.” As Congress debates whether to extend parts of the 2017 Tax Cuts and Jobs Act (TCJA), this stale refrain is back, and it’s just as wrongheaded as ever – but not for the reasons you think.

Let me explain. The primary (and I would argue, sole) purpose of the tax code is simple: to raise revenue to fund the government that voters say they want. That requires that we debate what we think the size of the government should be. I believe it should be very small, with most functions currently handled by the federal government instead being carried out by the private sector, by state and local governments, or the voluntary sector including philanthropy and civil society. Most people seem to disagree with me.

Either way, whatever we decide the size of government should be, we should then decide what is the best way to design a tax code that raises the necessary revenue with the least economic distortion. Economists have been debating this question for a long time, and a consensus seems to have emerged about consumption taxes being significantly better and less distortive than income taxes.

Republicans once were interested in the proper way to raise revenue. They once discussed pro-growth tax reform, base broadening, lowering marginal rates, and simplifying the tax code to improve efficiency and economic dynamism. That was a serious conversation rooted in a recognition that taxes can be distortive and that there is a right way and a wrong way to raise revenue. However, part of the argument also involved an implicit assumption that the government should be limited.

But today, too many Republicans act as though tax cuts are good regardless of design or their fiscal effects. Republicans want to extend the Trump tax cuts (or go further) while refusing to touch the largest drivers of government spending: entitlements. They gesture toward economic growth as a cure-all but fail to explain how growth alone — especially considering the design of this particular Bill — could cover a structural gap between what the government takes in and what it spends. In reality, growth alone is unable to accomplish what Republicans say it will.

Democrats, of course, are no better. They champion a vastly expanded government—more benefits, more subsidies, more industrial policy—but aren’t willing to raise taxes broadly enough to pay the bills. Instead, they sell the fantasy that we can fund European-style entitlements by taxing only the rich. Yet that’s mathematically impossible. The U.S. tax code is already highly progressive—more so than in most OECD countries. Making our tax code even more progressive, while politically convenient, won’t come close to covering the rising costs of Social Security, Medicare, and everything else Congress keeps adding to the budget.

The result is a bipartisan delusion: a political class eager to spend without taxing and a public that’s all too willing to let them. But as Milton Friedman famously warned, to spend is to tax. There’s no free lunch. If Congress doesn’t tax to pay for today’s spending, it borrows and it pushes the burden onto future generations. In other words, deficits are just future taxes in disguise.

Another Nobel-laureate economist, James Buchanan, understood this as well. He argued that deficit spending allows politicians to hide the true cost of government, separating the pain of taxation from the pleasure of spending. This disconnect leads to more government than the public would support if they had to pay the full bill today. Consequently, budget deficits aren't just bad accounting. They're a political tool used to evade accountability and expand government by stealth.

Of course, some argue that we can simply borrow to cover the spending we don’t want to tax for. That was never true. Even borrowed money must be repaid, which means future taxes must rise to service and retire the debt. But to be fair, this idea seemed more plausible when interest rates were low, and foreign investors and central banks appeared willing to absorb whatever debt the U.S. Treasury issued. That world is changing.

That’s why the old fiscal religion mattered. It was rooted in the conviction that voters should face the real cost of whatever they demand from government. If Americans want a 25 percent-of-GDP government, they should pay for it. But if they don’t want to pay a large share of their income to the state, the size of government should shrink. What we cannot do, but what we are doing now, is promise everything, taxing too few people, and making up the difference with debt. That path leads to slower growth, a weaker economy, and a crushing burden on future taxpayers.

So no, the problem isn’t whether or not tax cuts must be “paid for,” but, instead, that spending must be. The focus should be on aligning what the government promises with what the public is willing to fund.

If Republicans are serious about extending parts of the TCJA, they should pair that with spending cuts or structural reforms to entitlements. Provisions like full expensing can help by bringing some economic growth that alleviates some of the need for spending cuts. But that's not enough considering the lack of growth from the rest of the Bill and that we are already starting with a $2 trillion deficit. Meanwhile, if Democrats want a significantly larger government, they need to be honest about the high costs of their behemoth state, costs that far exceed the ability of billionaires alone to cover.

Let’s retire both the “pay for the tax cuts” trope and its equally misleading converse that we “don’t need to pay for tax cuts.” Each confuses the real conversation that we should be having about the size and scope of government. The issue isn’t how to fund lower taxes. It's how much spending we should cut if people want to pay lower taxes, or how to scale the size and scope of government down to what today’s voters are themselves willing to pay for. Alternatively, it’s how best to raise taxes to pay for the government that voters say they want. If they want big government, they need to pay for it, not to kick the can down the road for future generations to pay. There is no third option that isn’t extremely immoral.