Foreword: You Have to Pay For That

For nearly 250 years, the American republic achieved the extraordinary feat of living within its means. At the start of the new millennium, the federal government’s public debt amounted to less than one-third of gross domestic product (GDP), lower than at the start of the Second World War, and the federal budget stood in surplus. Our democratic politics, conducted by statesmen of both parties, can yield responsible fiscal stewardship.

We have not had that leadership in the past 25 years. Under Democratic administrations and Republican ones, Republican Congresses and Democratic ones, the budget deficit steadily grew. Crises of national security, financial stability, and public health prompted legitimate bouts of higher spending but, rather than borrow in bad times and repay in good, spending only ever ratcheted higher. Successive waves of tax cuts have not delivered the economic growth necessary to pay for themselves, instead compounding the problem. 

As a result, at what should be a moment of excellent fiscal health, with unemployment holding around 4% and asset prices at all-time highs, the federal budget deficit is forecasted to exceed $1.7 trillion this year—and climb toward $3.0 trillion over the next decade. Deficits at this scale distort our economy, obstruct productive investment, fuel inflation, and accumulate debt, which hobbles our national capacity to build infrastructure or provide for the common defense, and leaves future generations to pay the bill. Interest payments now exceed spending on the military.

The Tax Cuts and Jobs Act of 2017 (TCJA) cost nearly $2 trillion and most of its provisions are scheduled to expire at the end of this year. Making those provisions permanent would cost nearly $5 trillion over the next ten years, on top of the already unsustainable and steadily worsening budget situation. Nonetheless, Republicans have declared this extension to be their top legislative priority and President Donald Trump has proposed a number of additional tax cuts on top.

The Right can, should, and must do better. A democracy holds taxes and spending at low and sustainable levels only if the forces of fiscal conservatism counteract those of liberal profligacy. Yet, over the past generation, the Republican Party abandoned its post on what fiscal restraint required. Back in the 1980s, President Ronald Reagan signed five tax increases after his initial tax cut proved more costly than expected. Only more recently has the true cause of limited-government conservatism, which not only restrains spending, but also pays for the spending that does occur, transmogrified into a half-witted anti-tax zealotry that offered the voters bread and circuses while sending the bill to their children.

Ideally, conservatives should be working to reduce the deficit. But at a minimum, they cannot do anything to increase it. Whatever portions of TCJA are extended or made permanent must be paid for, with reductions in spending or offsetting increases in revenue. TCJA included a number of important reforms, such as immediate expensing of capital investments and an expanded Child Tax Credit. Extending these should be a priority. Likewise, reductions in marginal rates are desirable, insofar as they can be paired with measures to broaden the tax base. Some portions, even if they were defensible in the fiscal environment of 2017, will need to fall by the wayside now. Using all three of these levers—reducing the scale of the extension, cutting spending, and raising revenue—conservatives have the opportunity to craft responsible tax reform that will reduce inflation, promote growth, and build confidence in America’s ability to get its fiscal house in order.

This collection addresses the third of these levers, suggesting eight opportunities to raise revenue.

New Trade Policy for a New Economic Order

The new administration’s commitment to rebalancing the global trading system has brought a welcome focus to the important role of tariffs. In addition to promoting domestic investment, tariffs generate substantial revenue. A parallel “market access charge” focused on imbalances in the U.S. capital account could further promote both reindustrialization and fiscal responsibility.

1. Implement a Market Access Charge
Reducing the fiscal deficit while reducing the trade deficit
10-year revenue: $2,000 billion

2. Implement a 10% Global Tariff
Reducing the fiscal deficit while reducing the trade deficit
10-year revenue: $2,100 billion

3. Rescind China’s Permanent Normal Trade Relations Status
Ending our reliance on China and protecting the U.S. economy
10-year revenue: $300-500 billion

4. Reform the De Minimis Exception
Ending China’s trade giveaway while protecting Americans
10-year revenue: $24 billion

Fair Treatment of Corporations and Investment Managers

In recent decades, conservatives have focused heavily on providing favorable tax treatment to corporations and financial investors that were assumed to be driving economic growth and the creation of good jobs through their deployments of capital. In practice, this has not happened—to the contrary, the very beneficiaries of lower rates have led the assaults on both American industry and American values. Especially in an effort to achieve tax reform that will more effectively encourage productive investment, higher rates on those previously favored actors must be on the table.

5. Increase the Corporate Rate to 25%
Raising revenue while maintaining U.S. competitiveness
10-year revenue: $498 billion

6. Eliminate the Carried Interest Deduction
Treating investment managers like everyone else
10-year revenue: $63 billion

Eliminating Progressive Subsidies

The tax code is shot through with special treatment for countless industries and subsidies for any number of priorities, but certain provisions particularly stand out for both their extraordinary expense and their counterproductive promotion of progressive priorities that undermine the national interest. These should be removed.

7. Repeal the Electric Vehicle Tax Credits
Eliminating “green” distortions to American vehicle and energy markets
10-year revenue: $390 billion

8. Expand the University Endowment Tax
Distinguishing between universities and hedge funds
10-year revenue: $99 billion

Reform focused on making permanent the most important elements of TCJA, reversing the profligate overspending of recent years, and incorporating a number of these sources of revenue could deliver a more efficient and pro-growth tax code that also makes progress toward the Trump administration and Republican Party’s commitments to close the deficit, bring down inflation, and position America for a new golden age. That is a framework of which conservatives could be proud.