Lower taxes and spending are good for the economy. They produce strong expansion and will “grow” the country out of deficits. These were some of the Trump Administration promises. Those were also the promises of the GOP in the late 1970s in the runup to the election of President Reagan. Were they kept? Not exactly.
Are these policies good for the economy and our economic liberty? The evidence is yes, but the problem is these policies were only partly followed.
Both Reagan and Trump were influenced to cut taxes by celebrated supply side economist Arthur Laffer. But unfortunately both continued much of the ludicrous spending of their Democratic predecessors. Reagan promised to cut cabinet level departments. He didn’t. Trump unleashed the cost-cutting efforts of Elon Musk, who documented rampant waste given to us by both of our boodle-loving major parties and their economic illiterate something for nothing backers, no doubt many of whom are graduates of egregious state schools.
But for the 2025 fiscal year, the deficit was “approximately” $1.8 trillion, according to the US Treasury. That’s even though the economy was strong. The economy is growing through the creation of the private sector as contrasted with President Biden’s faux growth policy of putting everyone on the government payroll.
Laffer and his allies are partly following the ideas of one of the greatest Treasury Secretaries in American history, Andrew Mellon. His fabulous book Taxation is wunderbar. It is a trove of economic wisdom; an exposition of why low taxes produce prosperity and fatten government coffers and why high taxes lead to well-heeled people seeking shelter.
Becoming Treasury Secretary in 1921, Mellon inherited a depression from World War I. His fiscal policies—which called for low taxes as a way of generating more tax revenues but also including rigorous reductions in spending—were backed by presidents Harding and Coolidge. They succeeded until the crash of 1929, caused by disastrous Federal Reserve policies.
Mellon—who called for more tax cuts when the crash hit while Hoover raised taxes—was exiled to England. Mellon was even the subject of two ridiculous political trials under FDR that reminds one of Trump’s four indictments. Both Mellon trials resulted in exoneration (even Mellon’s opponents concede he was incredibly honest).
History is on the side of those governments that tax and spend less. That’s proven by policies of both right- and left-wing governments. But there is a downside to tax cutting. It’s too successful. It often pretends to reduce government but doesn’t.
There’s no doubt that steep tax cuts—from presidents Harding, Kennedy, Reagan, and Trump administrations to the enlightened policies of the German Federal Republic of the 1950s and 1960s, among others—were brilliant. Indeed, even the Clinton administration cut the capital gains tax. That generated more geld for our masters.
Combining some spending controls and strong private sector growth in his second administration, Clinton produced surpluses. But the problem with a low tax philosophy is that it’s incomplete if not accompanied by less government spending. The first unaccompanied by the second means so-called conservative, tax cutting, governments with piggy spending are as responsible as Liberal/Social Democrats for the $37 trillion of official debt the United States now supposedly has. (Note: I don’t believe the official number, which is based on dicey accounting. I prefer the numbers of independent groups independent of our Potomac Poloniuses. “Truth in Accounting” says the number is some $170 trillion. If current trends continue, the biggest federal government spending someday soon will be interest on the debt as the United States mutates into the Weimar Republic).
For those who pine for continued big government, the case can be made for low taxes accompanied by what one economist has called “a closet Keynesianism.” This is the idea of cutting some taxes but going on spending on everything. Examples include President Johnson going ahead with the Kennedy tax cut but spending far more than the projected startup costs of Medicare in the 1960s or President George W. Bush miscalculating the true costs of the drug prescription program. Yes, both W and LBJ cut taxes but outrageous costs and deficits continued.
Nevertheless, big tax cuts can raise living standards. They produce whopping GDP growth rates. Just compare the living standards of the two Germanies in the 1950s and 1960s. The Federal Republic’s economic policies led by a jovial economist, Ludwig Erhard, who was inspired by Ludwig von Mises. Indeed, compare Germany’s growth rates with those of post-WWII Britain, which by the 1970s, after mostly Labour governments and a few Conservative governments, was known as “the sick man of Europe.” A British prime minister whined that “we just think we won the Second World War.”
Under President Barack Obama, a few taxes were cut and there was one percent GDP percent growth. Some would argue that was good given that the country seemed on the verge of a recession or depression after George W. Bush’s disastrous war and spending policies. President Trump enacted much deeper tax cuts, and with Laffer’s advice, made them immediate, not delayed for months as under the Reagan cuts.
The result? Trump never got to the three to four of promised GDP growth points but he did get 2.5 percent growth before the covid panic. Millions under Trump—benefitting from lower taxes—obtained jobs they didn’t get under Obama and Bush.
So what’s wrong with steep tax cuts? Nothing, provided they’re done intelligently minus drunken sailor spending. Trump could have and should have done much better had he combined tax cuts with spending controls.
The Mellon policies, including the elimination of useless government bureaus and of spending, resulted in surpluses. The economy prospered and the “public debt was rapidly reduced,” wrote Benjamin M. Andersen in Economics and the Public Welfare. The latter didn’t happen under Trump.
When Musk realized that no huge spending cuts were coming, that no cabinet departments would be eliminated, he hit the road. About twenty years ago, when I would sometimes interview Laffer for the New York Post, I found him often brilliant in expounding the benefits of supply side. When I praised tax cuts but said the GOP struck out in reducing government, his reply was stark: He had no answer.
