President Trump recently submitted his budget plan for Fiscal Year 2020. The plan calls for a 7 percent increase in spending, bringing the total to $4.7 trillion. Tax revenue is projected to increase by 3 percent to $3.6 trillion; that will result in the deficit reaching $1.1 trillion. Given that the public debt already exceeds $22 trillion, is this a good budget?
President Trump has made a number of promises. He said he would stimulate economic growth, which was his top priority. He also said he would reduce tax rates, rebuild the military, and put the country on a path to balance the budget. While growth has accelerated, tax rates have been reduced and the military is being rebuilt—but the deficit is getting larger, not smaller.
Since the growth was the top priority, Trump looked at past government budgets that were in place when the economy experienced high growth rates. He looked to Presidents Reagan and Clinton for guidance.
President Reagan cut taxes for all Americans, including the wealthy; rebuilt the military; and tried to control government spending. After his tax cut, the economy went on a growth spurt, with the annual growth rate in 1984 exceeding 7 percent. Unemployment fell, inflation fell, and an era of economic prosperity followed. However, the budget deficit exploded.
Government spending was the problem, since tax revenue increased every year following the tax rate cut. Spending increased at a much faster rate in spite of Reagan’s attempt to control it.
President Clinton had sluggish economic growth during his first term in office. But in 1996 he cut the capital gains tax rate from 28 percent to 20 percent. Working with a Republican Congress, he was able to hold the line on government spending. He also reformed the welfare system with the goal of making it temporary assistance.
In his 1996 State of the Union speech, he declared, “The era of big government is over.” His policies resulted in tax revenue increasing by nearly 30 percent over the four years, while spending increased by only 10 percent.
The result was a budget surplus and an annual growth rate of 4.5 percent for each of the next four years.
Trump saw that lower tax rates, smaller government, welfare reform, and a strong military were what led to increased growth. So, he modeled his budget after those presidents. Tax rates will be kept low. The military will be strong. Welfare will be reformed. And he is reducing discretionary government spending. Why, then, is the annual budget deficit increasing?
In his $4.7 trillion budget, more than 60 percent will be spent on Social Security, Medicare, and Medicaid. Politically, it may be impossible to reduce spending in those areas; however, eventually our federal government will not be able to kick the can down the road. This problem needs a solution. Unfortunately, all of the solutions seem to be unfair.
Both Social Security and Medicare will be bankrupt within 10 to 15 years unless they are reformed. In the meantime, those programs will continue to increase government spending and will continue to add to the deficit. Reforming those programs will be extremely difficult. Taxes, however, cannot be raised to cover the increased spending.
The Social Security tax is already 12.4 percent of wages and the Medicare tax is 2.9 percent—that’s more than 15 percent of wages. Add it the federal income tax and some state and local taxes, and the tax burden is already too high. To save those programs, spending will have to be cut.
There is no fair way to cut spending. If that’s the case, then an optimum solution will be to find a policy that is the “least unfair.” There is only one solution.
The age to collect a Medicare benefit will have to rise, as will the age to collect Social Security; both will have to increase to at least 70 and in the future likely up to 72 or 75. This would result in more money going into the programs and less money being paid out.
Since people are living longer already and some argue that people born today may end up living to well over 100, this solution seems reasonable. The age of 72 or 75 today is not the same as it was years ago. In fact, there are a number of candidates running for president of the United States who are well into their 70s. President Trump is 72.
Given that the entitlement programs are untouchable this year, President Trump has submitted a budget that should reach the goals, except for the deficit problem. His opposition won’t think so. That will result in a fierce budget battle.
Let’s hope the American public wins the battle.
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