If Congress Doesn’t Cut Spending, Americans Will Pay Higher Taxes

The $2 trillion annual budget deficit obscures the cost of our large and growing government, keeping the taxes we pay systematically lower than spending. For now, the Feds borrow vast amounts of money to cover the difference.

Americans have benefited from being a relatively low-tax country. However, over the last few decades, we’ve been living beyond our means as government spending has grown unchecked. If the federal budget remains on its current trajectory, these facts can’t coexist indefinitely. Tax revenue can’t stay flat while spending continues to surge toward European levels of government expenditures.

Congress must reduce spending to keep taxes low. If spending remains on its current growth path, taxes will inevitably increase for all Americans, which will limit job opportunities, slow wage growth, and crush economic dynamism.

Next year, Congress will decide whether to extend the Donald Trump tax cuts. Making the changes permanent would maintain revenues slightly below the historical average while preventing a more than $4 trillion tax increase on Americans at every income level.

Keeping tax revenue at its current level for years will require Congress to significantly reduce spending beyond targeting waste, fraud or foreign aid (although those should also be addressed). The most significant portions of the current federal budget and main drivers of future spending growth are Medicare, Medicaid and Social Security.

If voters want the government to keep expanding, Congress should be honest with them about the cost of the taxes necessary to pay for it. Wealthy Americans will need to pay more, but there aren’t enough resources at the top of the income distribution to fix our budget deficit. For example, confiscating every dollar of income earned over $500,000 wouldn’t cover projected deficits. That assumes that 100 percent tax rates are feasible, which they aren’t.

Kamala Harris’s constitutionally questionable wealth tax is projected to raise revenue equal to 3 percent of the government’s projected deficit (by her optimistic estimates).

Taxes will have to rise on the middle-class and lower-income Americans to pay for all this government growth, just like in Europe.

In a recent Cato Institute report, I show that a single average-income worker would pay about $12,000 in higher taxes if he moved from the United States to Europe (an average of 22 EU countries). Those with higher incomes, lower incomes and families all pay more taxes through far-reaching wage taxes, payroll taxes, and value-added taxes on goods and services.

Europe’s high wage taxes are one reason they are poorer. They work fewer hours, have shorter careers, and their societies are less innovative. Europeans consume about 70 percent less than Americans, a clear signal that they are materially worse off.

If spending remains on its current path, the American government will eventually grow to the size of European governments, requiring European-style taxation. The lesson from Europe is that big government is costly for the rich, the middle class and the poor.

Since 2017, when Republicans passed the largely temporary $1.5 trillion tax cut, nominal spending has increased by 54 percent. At the same time, revenues are up 34 percent. This doesn’t show that the tax cuts have paid for themselves. Many things have happened during this period: inflation, a pandemic and several trillion-dollar spending packages. It does show a trend that has been true since the mid-2000s: spending has consistently increased faster than tax revenue.

We must keep taxes low, but it can’t be done without serious spending discipline, including spending cuts. Without reforms, Americans risk a low-growth, high-tax, European future. However, rational fiscal policy that ties low and well-designed taxes to limited and well-targeted spending will allow more Americans to keep a greater share of their earnings and facilitate sustainable long-term economic growth.