House Republicans have passed a resolution calling for $4.5 trillion in tax cuts over the next decade, but only $1.5 trillion in budget cuts. That would increase the national debt by over $2.8 trillion, even assuming some of the tax cuts result in more economic growth. Moreover, the budget cuts likely won’t fully materialize, because it effectively requires Medicaid cuts, and Medicaid cuts are so unpopular that they aren’t likely to happen to any substantial degree. So the national debt will increase by at least $3 trillion as a result. The tax cuts House Republicans want should be scaled back, to keep the U.S. from going broke.
House Republicans narrowly adopted a budget proposal late Tuesday that serves as a blueprint for implementing President Trump’s agenda…In a 217-215 vote, the House adopted the resolution, with just one Republican joining all Democrats to oppose it. The resolution now goes to the Senate, which has been pursuing its own budget proposal…
Their plan calls for at least $1.5 trillion in spending cuts over a 10-year period and instructs a number of committees to find ways to reduce their budget impact, while increasing spending for several other issue areas. The House Ways and Means Committee is tasked with implementing the $4.5 trillion in tax cuts over a decade. The resolution would also raise the debt ceiling by $4 trillion.
Here are the areas where spending would increase:
- Up to $110 billion in additional spending for the Judiciary Committee
- Up to $100 billion for the Armed Services Committee
- Up to $90 billion for the Homeland Security Committee
Here are the committees that are tasked with finding the cuts:
- At least $880 billion by the Energy and Commerce Committee
- At least $330 billion by the Education and Workforce Committee
- At least $230 billion by the Agriculture Committee
- At least $50 billion by the Oversight and Government Reform Committee
- At least $10 billion by the Transportation and Infrastructure Committee
- At least $1 billion by the Financial Services Committee
- At least $1 billion by the Natural Resources Committee
The final product must be deficit-neutral to comply with reconciliation rules, and Republicans are relying on economic projections that show the tax cuts would spur economic growth that would increase tax revenues. Those projections have been questioned by outside experts and Democrats who describe them as overly optimistic. One analysis found that the budget proposal would allow for a deficit increase of $2.8 trillion through 2034.
The cuts in education and agriculture are achievable (such as by cutting graduate-school student loan programs that encourage colleges to jack up tuition and maintain predatory, low-quality graduate-school programs. Or cutting food stamps, such as for able-bodied people who aren’t working, or don’t need the full amount of food stamps they are getting now. Food stamps are most of the Agriculture Department’s budget, while the rest is agricultural subsidies that can be trimmed).
But the huge cuts assigned to the Energy and Commerce Committee won’t fully happen, even if they ought to. Telling the Energy and Commerce Committee to cut $880 billion effectively requires it to cut Medicaid by at least part of that amount, even though there isn’t any political will to cut it much, and Donald Trump has said Medicaid and Medicare benefits won’t be cut. As Healthcare Dive explains, “Although the budget resolution does not mention Medicaid specifically, lawmakers would be hard pressed to find cuts sufficient enough to meet its targets without touching Medicare or Medicaid. If the Energy and Commerce Committee — the committee tasked with finding $880 billion in savings — cut everything that’s not healthcare-related, the committee would still be short $600 billion, according to the New York Times.”
So healthcare spending — such as Medicaid — has to be cut by $600 billion over a decade to meet the resolution’s instruction to the committee by $880 billion.
Cutting Medicare is even more unpopular than cutting Medicaid, and Trump has been even more emphatic about not cutting Medicare than Medicaid, so it is Medicaid that would have to be cut. Medicaid spends billions of dollars on fraudulent claims every year, but it would be hard to get rid of most of it, and could require a lot more administrators to detect it, even as the Trump administration is cutting the number of federal employees. It is unlikely that the amount of fraud could be cut by more than $200 billion over the next decade. Effectively, that means that Medicaid benefits would likely have to be cut by around $400 billion over the next decade to achieve the projected spending cuts. But cutting Medicaid is highly unpopular with voters — in one poll, only 10% of voters supported cutting Medicaid.
As a result, most of the $880 billion in cuts assigned to the Energy and Commerce Committee are unlikely to be achieved.
The resolution passed by the House calls for $4.5 trillion in tax cuts. Those tax cuts are expected to include exempting tip income and overtime earnings from taxes, although the House resolution does not specifically mention them. Exempting tip income has been estimated to cost $150 billion to $200 billion over the next decade. But that’s an under-estimate, because once tips are exempt, people in the service industry will push to have more of their income come in tips, and less in non-tip income. So the cost will be bigger than that.
Exempting overtime would cost far more — between $680 billion and $3.1 trillion over a decade, according to the Tax Foundation, depending on whether overtime is exempt from just income taxes, or also exempt from social security and payroll taxes. Moreover, “exempting overtime pay from income tax would significantly distort labor market decisions. Employees would be encouraged to take more overtime work” (for example, some employees might try to work 80 hours one week and zero hours the next, rather than 40 hours every week, to take advantage of the tax break).
But there is no reason to give special tax breaks to people with tip income or overtime income. That is as unfair as exempting people who work on only Wednesdays or weekends from taxes, while forcing people to pay taxes on income they make during the week.
As Jared Walczak of the Tax Foundation, who supports cutting wasteful spending, explains:
“No Tax on Tips” may sound good, but it’s poor policy.
Most low-income workers don’t receive tips, and not all tipped workers are low income. Among workers in the bottom half of hourly wages, only 4% are in tipped occupations. Why should certain categories of low-income workers receive a tax preference not available to others at similar income levels?
(In fact, many lower-income tipped workers are already exempt from federal income tax. Thirty-seven percent of tipped workers have no federal income tax liability, so the exemption would be targeted at those who already have relatively higher incomes. If your mental image is of a diner employee who makes relatively little, that may be the wrong image of the beneficiaries of this policy.)
Exempting tips, moreover, creates an incentive to convert more compensation to tips to avoid income tax. It’s not at all clear that a further expansion of tipping culture is desirable, especially if it’s in realms where it would only happen because of the tax preference.
And even assuming no increase in tipping, exempting tips will cost an estimated $118 billion over 10 years at the federal level, and meaningful amounts in any states that follow suit, while creating largely unhelpful incentives rather than prioritizing economic growth and/or delivering targeted relief. If you want to provide tax relief, is this really the best way to do it?
Does it make sense to exempt tips from income taxes? No, explains Catherine Rampbell in the Washington Post:
This is a bad idea — whether you care about equity, or the federal budget deficit, or the integrity of markets and tax administration. Tipped earnings are already relatively likely to evade taxation since they’re often transacted in cash and less traceable by Uncle Sam. Making all of these earnings legally tax-free raises even more serious questions of fairness.
Why should a waiter or blackjack dealer who gets most of their income from tips be exempted from taxes, when an employee at a nearby Walmart or a bus driver earning the same income — or perhaps much less — must pay taxes on all their hard-earned wages?
The proposal would also cost quite a bit of money. Exempting all tip income from federal income and payroll taxes…would lower federal revenue by $150 billion to $250 billion over the course of a decade, the Committee for a Responsible Federal Budget estimates….The payroll tax exemption would starve the Social Security and Medicare trust funds of needed revenue in particular, potentially hastening benefit cuts.
But even those huge sums likely understate the cost, since those estimates assume the tax policy doesn’t change anyone’s behavior. Which is a fairly rosy assumption. This new loophole would open up tons of ways to game the tax system by reclassifying more earnings as supposed “tips.” However many workers receive gratuities now — Yale’s Budget Lab estimates about 4 million people are in tipped occupations — we should expect that number to balloon….Plus, consumers are already aggravated by the proliferation of tip requests, as Tax Policy Center researcher Steven M. Rosenthal points out. Do we really want to encourage even more tin-can shaking, by cable companies, dental practices and clothing retailers, too?
By increasing the budget deficit, exempting tip income could also fuel inflation. Massive debt-financed government spending increased the inflation rate under President Biden. Those deficit-increasing policies caused inflation, according to even Democratic economists like Harvard’s Larry Summers — who was Treasury Secretary under President Clinton — and Obama economic advisor Steven Rattner.
The federal budget deficit doubled to roughly $2 trillion from 2022 to 2023, noted the Tax Foundation. And it will be around $2 trillion this year, even before accounting for any tax cuts that Republicans may pass this year. That doubling is “basically unprecedented in U.S. history during relative peace and prosperity,” noted economist Brian Riedl in September 2023.
Given how huge the budget deficit is, the House Republicans’ desire to increase spending on defense and homeland security by $300 billion over a decade is misguided. If the the deficit were smaller, and the budget didn’t already have to devote over a trillion dollars a year to make interest payments on the national debt, increases might be more affordable. But we are just too financially strapped as a country to pay for such increases.
Instead, we should try to cut wasteful Pentagon spending — the Pentagon consistently fails audits — and replace expensive weapons systems that may become obsolete (like manned aircraft that can be downed by a swarm of drones, or aircraft carriers that can be sunk by a swarm of drones) with cheaper weapons systems (like drones). Way back in 2013, a think-tank identified $17-$20 billion in readily achievable savings that could be made to the 2013 military budget, but Congress adopted none of them. Far more waste than that could be eliminated from the military budget — the Pentagon fails to track over $2 trillion in assets, about 61% of all military assets.
