Spending Cuts, Not Tax Increases, Are Best for Growth
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The Congressional Budget Office has released its monthly budget review which shows that the federal budget deficit is on track to double this year from $1 trillion in 2022 to $2 trillion in 2023. This year’s deficit will be nearly 8% of gross domestic product, the highest level since World War II, with the exception of the pandemic and the 2008 recession.The deficit is more than double the 50-year average level of 3.6%, and is projected to increase to 10% by 2053. According to the CBO, the increased budget deficits are primarily the result of higher levels of spending and not from lower levels of revenue.Sooner or later, Washington will need to take action to reduce the soaring deficits and debt. When it does, it should focus on spending cuts and not tax increases. President Biden and Congressional Democrats support raising taxes to reduce the deficits. However, a large body of academic research indicates that raising taxes to reduce deficits is much more damaging to the economy than cutting spending.A new research report by the Tax Foundation reviews a number of studies on how other countries have successfully reduced deficits and debt. These studies all present evidence that cutting spending is much less harmful to economic growth than raising taxes.A study published by the National Bureau of Economic Research looked at data from sixteen of thirty-five countries in the OECD over a thirty-year period, including the U.S., Canada, Japan, and most of Europe. It reviewed 3,500 policy changes to reduce deficits with spending cuts and tax increases.The study found that deficit reduction programs based on spending cuts had little or no negative effects on economic growth and were successful in reducing deficits. By contrast, almost all plans based on tax increases were followed by “deep and long-lasting recessions” as investment and business output fell, resulting in larger not smaller deficits.A European Central Bank analysis found that countries which focused on spending cuts to reduce deficits had higher economic growth after five years than countries which focused on tax increases.Another study of seventeen OECD countries over a thirty-year period found that countries that attempted to reduce deficits by raising income tax rates consistently experienced lower economic growth.These studies all show that the best way to reduce long-term deficits is to focus on a gradual reduction of spending while avoiding tax increases that would reduce investment and economic growth. Pro-growth tax policies combined with spending restraint will increase economic growth and lead to a higher standard of living for all Americans.

Bruce Thompson was a U.S. Senate aide, assistant secretary of Treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years. 

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