Published February 18, 2025
Over 40 years ago, Ronald Reagan said he wanted to raise defense spending to counter the Soviets, cut taxes, protect the social safety net (Social Security, Medicare, and so forth), and balance the budget. He ended up doing only the first three, thereby launching the era of ever-ballooning national deficits the U.S. has remained mired in.
Donald Trump’s fiscal platform is essentially identical, despite the many differences he has with Reagan. As his signature Tax Cuts and Jobs Act is set to expire, Trump wants to cut taxes even further, raise defense and border security spending, protect entitlements, and cut the deficit. Note that the goal of balancing the budget is now not even given lip service, so deep is the fiscal hole which we have dug for ourselves.
Last week’s release of draft budget resolutions from House and Senate Republicans have been faithful to Trump’s general goals: proposing cuts in taxes, hikes in defense spending, and generally protecting entitlement programs. Yet their plans depart in one significant way: they both will significantly increase the deficit over the next ten years.
This sounds like a repeat of the Reagan years, and so it is, but with two significant differences. First, the proposed increases in defense spending are far short of anything approaching what the nation needs to keep up with China and the autocratic axis it is building. Second, our fiscal situation is much more perilous than it was in the early 1980s.
Reagan hiked defense spending from 5% of GDP to just under 7% in four years, and kept it above 6% of GDP for the remainder of his presidency. Supposed uber-defense-hawk Senator Lindsey Graham’s budget resolution, in comparison, only proposes increasing defense spending by $150 billion over a ten-year period.
That would result in the United States spending a bit under $1.1 trillion on defense in 2034. The Congressional Budget Office projects that GDP will be $41.6 trillion that year. Combine the two figures and you reach the sobering conclusion that the hawkish defense budget projects a decline in US spending as a share of GDP from the current 3.4% to a mere 2.6%—at a time when President Trump is asking European countries to hike their defense spending to 5% of GDP.
That simply won’t do, especially when China is increasing its military power and some estimates show it spends almost as much as the United States does on its military. America will either have to cede global dominance to the Chinese, or Republicans will have to hike military spending beyond the current budget estimates in the future.
But, on its own, that would increase the deficit and debt even more given the GOP’s fixation on maintaining revenues at their current level of roughly 17% of GDP. But that comes at a time when our deficit is already at non-pandemic peacetime highs, and when our total debt held by the public is already 120% of our annual GDP.
It’s important to note the contrast with the 1980s. Reagan could increase the deficit because publicly held debt was only 31% of GDP when he took office. His two terms resulted in a significant increase, but the debt to GDP ratio was only around 50% when he left office.
The nation was still on a sound fiscal footing and remained so until the Great Recession, the pandemic, and the combination of increased domestic spending and the Trump tax cuts roughly doubled our debt-to-GDP ratio in a mere 16 years.
Some will argue that Elon Musk’s DOGE committee and increased economic growth will solve this problem. But that’s very unlikely.
The cuts DOGE is undertaking will help but won’t come close to equaling Musk’s public proclamations, absent either Congressional action or the Supreme Court giving the executive branch unprecedented power to cut congressionally authorized spending, which comprises the vast majority of public spending. Economic growth may rise in Trump’s second term, but his primary method of delivering that is through cutting taxes, and the United States did not see significant increases in the growth rate following either the Bush or Trump tax cuts.
America’s declining fertility rates make a rosy economic scenario even less likely. Economic growth is driven primarily by two factors: productivity growth and growth in the labor force. The Total Fertility Rate (TFR) has been well below the level needed to keep the population level (2.1 births per woman) for most of the past 50 years, and has now declined to a record low 1.66.
Here, demography is destiny. Either Americans start having more children than they have since the 1960s, or we increase the level of immigration to offset the decline in the native-born labor force. The latter option is clearly something that many, if not most, Trump supporters do not want.
These facts mean the fiscal center can no longer hold. Trump and Republicans need to make the hard choices they have hitherto avoided concerning entitlement and other spending. And they need to abandon their fixation on keeping federal revenues fixed at their current levels.
Increasing revenues does not necessarily mean hiking marginal tax rates on individuals or businesses. Supply-side theory says doing that would decrease the incentive to create or produce, and Republicans should generally avoid that course at all costs.
But supply-side theory also holds that increasing the tax base removes tax-favored sources of investment, thereby potentially increasing overall growth. Rather than invest or spend in areas with an artificially high rate of return distorted by implicit subsidies buried in the tax code, savings would instead flow to economically productive activities.
Raising revenue and increasing economic growth should be a no-brainer for even the most dyed-in-the-wool anti-tax advocate.
There are many examples of low-hanging fruit that Republicans should harvest as they pursue this path.
First are the many tax write-offs that flow primarily to the well-to-do. The rich can write off the mortgage interest paid for their homes, exclude the premiums their employer pays for health insurance from their income, pay no tax in interest earned on bonds issued by state and local governments, or deduct the value of charitable gifts. The Treasury Department lists 170 different write-offs, exclusions, or reduced rates of taxation, very few of which are readily available to the average taxpayer.
Republicans should ask whether taxpayers in the top two tax brackets really need these subsidies. Does a couple earning at least $500,000, the lowest amount of taxable income to qualify for one of these top tax rates, really need to deduct their home mortgage interest to afford a home? Does giving them up to $500,000 tax-free upon the sale of their principal residence make any sense? Should a rich person get a tax write-off for giving yet another multi-million gift to the fabulously wealthy Harvard University?
Of course it doesn’t, and eliminating or curtailing these tax breaks for the households in the top two tax brackets could raise tens of billions of dollars a year in revenue and reduce economic distortions at the same time.
Billions more could be raised by reducing the tax benefits that flow to wealthy non-profits. Entities like Ivy League colleges or the Gates Foundation manage tens of billions of dollars in their endowments, yet pay only a fraction of what private businesses or households would pay on their capital gains. Reducing that gap is simple fairness and presumable would also force these bloated institutions to make the same type of hard budgetary decisions that private companies make daily, and that the country needs to.
Wealthy senior citizens get substantial subsidies on their Medicare Part B and Part D premiums. Manhattan Institute budget analyst Jessica Riedl found in 2021 that simply reducing the subsidy for seniors with retirement incomes in the top 30% of retirees would raise $470 billion over a decade. The effect of inflation since then surely increases that total substantially.
Tariffs on imported goods could be another way to raise revenue and stimulate the economy. The revenue from even 10% tariffs could be considerable. A Center for a Responsible Federal Budget analysis found that the 10% tariffs on imports from Canada, Mexico, and China that President Trump proposed could raise $1.5 trillion over ten years. If those tariffs increased investment and employment in the United States, as tariff advocates believe they will, revenue hikes would likely be even larger.
I could go on, but the point is simple: reducing or eliminating tax breaks and subsidies that flow to people or entities that don’t need them would bring in hundreds of billions—and perhaps trillions—of dollars in revenue over the ten-year budget window. The economic reordering that supply-side theory says should happen from the efficient reallocation of capital should bring in much more.
Even a country as rich and large as America cannot go on borrowing forever. The federal government already pays more for net interest on past borrowing each year than it pays on defense. At some point, investors will stop thinking of U.S. bonds as a risk-free investment, and the increase in interest rates to finance the existing debt will hamstring us for years to come.
America faces a number of challenges simultaneously. Its population is aging, which drives up entitlement costs. Its global position is being threatened, which increases the need for defense spending. Its labor force is on the cusp of shrinking without sustained high levels of immigration, putting a damper on growth prospects.
The country cannot afford to meet all of these challenges by putting more money on the national credit card. It needs to meet the challenge by right-sizing its spending and tax policies. Done right, an effective revenue-raising policy could be exactly the key that keeps our domestic and global commitments while unlocking the door to enhanced productivity growth.
Henry Olsen, a senior fellow at the Ethics and Public Policy Center, studies and provides commentary on American politics. His work focuses on how America’s political order is being upended by populist challenges, from the left and the right. He also studies populism’s impact in other democracies in the developed world.
