President Trump and Republicans are trying to pass a bill to cut taxes by $4.5 trillion, and are trying to partially “pay for” those tax cuts by reducing government spending by $2 trillion, including cutting Medicaid and SNAP by $800 billion. Cutting government spending to “pay for ” tax cuts makes a bad economic policy much worse. If Republicans want to cut taxes, the best option for Democrats is to insist that they not be “paid for.” The signature economic accomplishment of Trump’s first term was the 2017 Tax Cuts and Jobs Act, which reduced tax rates for individuals and corporations. Many of the 2017 provisions are set to expire this year, which explains the rush to extend them now. One of the Democrats’ main arguments in 2017 was that the tax bill deepened the government deficit. But this is the wrong way to judge the merits of tax policy. Many believe that the government is like a household and that it needs to collect tax revenue to be able to spend. This logic leads to a further misconception that spending increases and/or tax cuts have to be “paid for” or offset by new revenue or spending cuts elsewhere in the budget. While Congress has imposed rules that require deficit-neutral legislation, there is nothing inherent in our monetary system that requires spending and taxation to go hand in hand. Spending and taxation are macroeconomic tools with different functions that the government can use to manage the economy. These tools, therefore, must be evaluated separately, based on their impact on the economy.  And indeed, tax policy and spending policy are set differently — taxes through tax law, spending by appropriation. It is only a self-imposed rule that links the two. Whether or not spending and taxation policies lead to a deficit is immaterial and cannot be known in advance; we only find out at the end of the fiscal year. What matters is whether they allow the government to accomplish its policy goals.   Government deficits are not the same as private-sector deficits. The U.S. government cannot go bankrupt because all of its obligations are denominated in the dollar — the currency that it issues and over which it has a monopoly. Our government cannot run out of dollars or be forced to default due to having “too much” debt. Even the arch-conservative Federal Reserve Board Chair Alan Greenspan said as much: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” The commonly used argument that at some point taxes will have to be raised to pay for the government debt does not correspond to the historical reality either. Since World War II, income tax rates on the wealthy and corporations have been frequently lowered in the U.S., demonstrating that taxation is ultimately a policy (and a political) choice. Meanwhile, the U.S. government has never been forced to default or to pay a premium on its debt by financial markets, despite a steadily increasing debt-to-GDP ratio. Neither has the status of the dollar as the global reserve currency been affected — the dollar is as strong today as it’s ever been.   If deficits should not figure into evaluating the desirability of tax policy, how should we think about taxes? There are two important issues to consider in case of the proposed tax cuts. First, will this policy lead to more income and excessive spending in the economy, thus becoming inflationary? Second, does this policy negatively affect income and wealth inequality?  Since much of what is in the 2025 bill would extend provisions of the 2017 legislation, it is unlikely to have a significant inflationary impact. However, the Republican tax policy will continue to exacerbate income and wealth inequality, which is exactly what the 2017 tax bill did. This, and not the budgetary impact, is what makes the bill bad economic policy.  Saying that it’s okay to allow tax cuts to add to the deficit will sound like blasphemy to many, but what is worse — allowing the tax cuts to add to the deficit or having Republicans “pay for” them by cutting Medicaid and SNAP?  In the past, both Democrats and Republicans have passed legislation through the reconciliation process leading to an increase in the federal deficit. Indeed, the first Trump tax cuts were largely “unpaid for.” Further, even the current tax cuts aren’t fully paid for; the $4.5 trillion in decreased tax revenue is only matched by spending reductions of $2 trillion.  It is fine for the U.S. government to run deficits in its own currency — the dollar. This has not and will not have a negative impact on the economy. Cutting government spending, on the other hand, will not only directly affect the recipients of programs such as SNAP and Medicaid, but will have ripple effects throughout the whole economy by reducing our national income. Since the tax cuts are likely to pass with or without Democratic support, the best option for Democrats is to negotiate with the Republicans to allow the tax cuts to go “unpaid.” This strategy will allow the Republicans to have their cake and eat it, too. In exchange, Democrats can save Medicaid and SNAP, at least for now.  Yeva Nersisyan is chair of the economics department at Franklin & Marshall College. ...read more read less