Illustration by Jandos Rothstein
This article appears in the December 2024 issue of The American Prospect magazine. Subscribe here.
Seemingly, President-elect Trump has it all. Republicans control the White House, Congress, and the Supreme Court. Trump’s legislative allies are on board to extend and expand Trump’s 2017 tax cuts, as well as to slash government spending.
There is only one obstacle: reality. Once the cutting gets specific, grave problems arise and one part or another of the Trump coalition will resist. Democrats, if they do their job, will have a field day pointing out how valued government benefits are being sacrificed to finance tax cuts for billionaires.
Extending expiring provisions of the 2017 Tax Cuts and Jobs Act carries a ten-year revenue cost of at least $4.6 trillion, according to the Congressional Budget Office. The law cut taxes for the top 1 percent by an average of $61,090 per household for 2025; the average savings for the bottom 80 percent is well under $2,000.
In addition, Trump proposed at least $2 trillion in other tax breaks during the campaign, including ending taxes on Social Security, overtime income, and tip income, and lowering the corporate tax rate for domestic manufacturers to 15 percent.
On top of that, Trump promised to repeal the 2017 law’s $10,000 cap on state and local tax (SALT) deductions, mainly the costs of mortgage interest and property taxes. This was the sole progressive provision of the tax cut package, designed partly to pay for other tax cuts and partly to punish affluent taxpayers who own expensive houses in blue states. But a lot of Republicans live in those states, too. Blue-state Republican legislators want the cap repealed, and Trump has signaled his support. If Congress does nothing, the cap sunsets at the end of 2026.
Repealing the cap would cost $1.2 trillion over ten years. Nearly half of the tax savings (42.8 percent) would go to the top 1 percent, and 93.2 percent would go to the top 20 percent. Most taxpayers would get nothing because they don’t itemize deductions.
Once the cutting gets specific, grave problems arise and one part or another of the Trump coalition will resist.
Trump has said that he can pay for all of this tax-cutting by increasing across-the-board tariffs. His exact proposal has bounced around: sometimes 10 percent, sometimes 20 percent, plus a 60 percent or higher tariff on goods made in China.
Dream on. At present, tariffs on imports of industrial goods have an average rate of just 2 percent and bring in just 2 percent of all government revenue. If tariffs were raised to 10 or 20 percent, much of that would function as a surtax on consumers, though some of it would be borne by importers and retailers, depending on the industry. Tariffs on manufacturing components would also increase the cost of finished products. The bottom line is that higher tariffs would depress the economy, and not begin to make up for lost revenue from Trump’s other tax cuts.
Trump’s business supporters will unite against his tariff proposals. Targeted retaliatory tariffs against China’s export subsidies and dumping made sense as China policy and industrial policy, which is why President Biden maintained them. But across-the-board tariffs are something else entirely.
THE OTHER WAY TO FINANCE TAX CUTS is with spending cuts. While Trump has not fully embraced Elon Musk’s proposal to cut federal spending by $2 trillion a year, he has proposed substantial cuts, while making Musk the co-lead on a “government efficiency” advisory board that will recommend more.
The problem is that most of the big-ticket items provide valued benefits to the middle class, such as Social Security, Medicare, and Affordable Care Act subsidies. Fully $5.8 trillion of the $6.75 trillion federal budget is spent on Social Security, health care, defense and veterans’ benefits, and interest on the debt. Put another way, you could cut everything else in the budget and not get close to $2 trillion.
Trump is a better politician than Musk. In the same way he revised his stance on abortion, he has backed off cutting Social Security, Medicare, or Obamacare. He might try to repeal Biden’s more generous Medicaid spending. But taken as a whole, the American welfare state is so miserly that there are scant savings available from further slashing spending for the poor.
Trump has also spoken of clawing back unspent Biden infrastructure and local aid money. The problem with that is twofold.
First, many subsidies under the Inflation Reduction Act, the CHIPS and Science Act, and other industrial-policy support have gone to underwrite new production and jobs in red states. These projects are just getting up and running. If Trump tries to abort them, politicians in those states will scream bloody murder.
Second, emergency COVID aid to states and cities, which reached an unprecedented $800 billion in relief, is already running out, and much of it will end this fiscal year regardless of what Trump does. If anything, red states were more reliant on federal aid, and this is already causing excruciating dilemmas.
According to a survey reported by Governing magazine, Virginia GOP Gov. Glenn Youngkin has proposed spending nearly $900 million over the next two years to help prop up the state’s pandemic-era child care expansion. In Republican-led Indiana, lawmakers have already acted to expand child care.
States are not permitted to run budget deficits, so these programs must be financed with higher taxes or cuts to other services. Should Trump claw back unspent federal aid, it would intensify the pressure and place Republican officials in a political bind. The GOP supports Trump, but the usual pressure points of state and local politics have not been suspended.
IF TRUMP INSISTS ON HIS TAX CUTS and doesn’t slash Social Security, Medicare, Obamacare, or aid to states and cities, there is only one alternative: increasing the federal deficit. The deficit was $1.83 trillion for the fiscal year that ended September 30, or about 6 percent of GDP. That was already high by historical standards. But with all of his tax cuts, Trump would add as much as $700 billion a year, or close to three additional percentage points of GDP.
At a time when the economy is already near full employment, a deficit on that scale would spook bond markets. More importantly, it would alarm the Federal Reserve. While there are few deficit hawks left in the congressional Republican Party, the Fed is a prime aviary.
Trump may control all three branches of government, but he doesn’t control the Fed.
The stock market took off like a rocket after Trump was elected. Investors and corporations slavered over tax cuts, and investment bankers, hedge funds, and tech monopolies savored the end of antitrust enforcement and a new merger wave. By any normal measure, the stock market is overvalued. All it will take is an abrupt shift in interest rates, and the market will come thudding back down. Nothing will reverse the Fed’s rate-cutting as surely as unsustainable deficits.
Trump may control all three branches of government, but he doesn’t control the Fed. Trump suggested that Fed chair Jerome Powell might wish to resign so the new president could pick his own chair. When a reporter asked Powell about this, he responded with a flat no, adding for emphasis that it’s “not permitted under the law” for presidents to remove members of the independent central bank. Powell’s fixed term doesn’t expire until mid-2026, and he intends to stay.
You might imagine an enraged Trump trying to get Congress to amend the Federal Reserve Act to make it possible to fire the Fed chair. Imagine how the bond market would react to that.
THE LIKELIHOOD IS THAT TRUMP will insist on most of his tax cuts, find whatever spending cuts are palatable to his coalition, add some token tariffs just because he likes them so much, and take his chances with an enlarged deficit. That will give Democrats plenty to shoot at.
Republicans will have a narrow House majority of between 220 and 221 votes at this writing. Trump has named a sitting member of Congress, Elise Stefanik, as his U.N. ambassador, and another, Michael Waltz, as national security adviser. In the short term, that narrows the Republican House advantage even further.
When the two chambers have different budget bills, that requires a reconciliation process on which House and Senate must agree. Getting the House GOP to agree on anything has been an impossible task the past two years; getting in sync with the Senate is not guaranteed.
Meanwhile, Democrats could submit their own proposals, with a clear narrative: Trump and the Republicans are cutting your health care, child care, home care, public education—you name it—to finance tax giveaways to the rich. Democrats want to raise taxes on the rich, the better to expand help to regular people.
This is simply better politics for Democrats than for Trump. As both parties look forward to the 2026 midterms, Trump’s tax and budget program will do almost nothing for the grumpy disaffected voters who put him in office, and quite possibly leave them worse off.
