WASHINGTON (PNN) - February 8, 2025 - The Department of Government Efficiency has the objective of cutting government spending by $2 trillion per year out of $6.8 trillion in spending. This is nearly as large as the $2.43 trillion/year in individual income tax.
Tariffs were $80B/year last year. Increasing it to $500B combined with cuts in waste, fraud and adding tariffs would offset income tax.
Eliminating individual income tax would mean the IRS could be eliminated and replaced with another less costly agency. This would save $10 billion from a $12-13 billion annual budget. Having a blockchain financial, accounting and payments system could eliminate Ghost Beneficiaries. Blockchain can ensure that aid programs, pensions and Social Security are received only by eligible individuals, reducing fraud. In 2022 alone, there were $13.6 billion of “improper” Social Security payments.
Cutting the taxes would boost economic growth.
Taxfoundation (dot org) has growth and opportunity tax plans that are pro-growth. Hyper efficient, simple rules and reduced tax levels without deficits would boost growth and lower interest rates. Massive economic boom means more taxes from distributed profits.
Blockchaining government spending would make audits easy and spending transparent. This could be $30B/year in benefit on just accounting and reduced waste and fraud.
No individual income tax. No IRS. Big spending cuts scenario.
Eliminate Individual Income Tax: As before, all federal individual income taxes are abolished (representing roughly $2 trillion in lost revenue).
Spending Cuts: $2 trillion in annual spending cuts.
Interest Rate Reduction: Interest rates are reduced enough to halve the interest payments on the national debt. Current interest payments are approximately $680 billion so a reduction means savings of about $340 billion.
Strong economic growth would mean good economy for jobs. Reducing the competition for debt would reduce interest rates.
Balanced Budget: The combination of spending cuts and interest savings is assumed to be sufficient to offset the revenue loss from eliminating income taxes and balance the budget. ($2T spending + $0.34T interest = $2.34T, this is enough to balance the budget).
Reduced Severity of Spending Cuts: The interest payment savings significantly soften the blow of the spending cuts in terms of balancing the budget. While $2 trillion in programmatic cuts is still enormous, the overall reduction in required outlays is smaller than if the interest payments remained high.
Lower interest payments on debt. The interest payment is around $340 billion.
Supply-Side Effects (Still Strong): The elimination of individual income taxes remains the primary supply-side driver. The same arguments from the previous scenario apply increased incentives to work, save and invest, potentially leading to higher GDP growth. The counterarguments (labor supply elasticity, consumption vs. investment, inequality) also still apply.
Demand-Side Effects (Less Negative, Still a Concern): The $2 trillion in programmatic spending cuts still represent a significant reduction in aggregate demand. This is a contractionary force.
However, the $340 billion reduction in interest payments does not directly reduce aggregate demand in the same way. This is a crucial distinction. Interest payments are a transfer from taxpayers to bondholders (many of whom are domestic). While reducing these payments frees up government resources, it doesn’t directly remove money from the circular flow of the economy in the same way that cutting, say, infrastructure spending or Social Security benefits would. The bondholders receive less interest, but that money doesn’t disappear; it just isn’t being channeled through the government.
The net effect on demand is still likely negative, but significantly less so than in the previous scenario where we assumed all $2 trillion+ in balancing came from direct spending cuts.
Interest Rate Effects (Positive, and Now a Key Driver): The scenario explicitly states that interest rates are lowered. Lower interest rates are stimulative, encouraging investment and consumption.
The mechanism of the interest rate reduction matters. If it’s solely a result of lower government borrowing (due to the balanced budget), that’s a market-driven outcome, and the positive effects are more likely to be sustained. If it’s achieved through aggressive Federal Reserve intervention, there could be inflationary risks down the line. We’ll assume for this analysis that it’s primarily a result of reduced government borrowing demand.
The Debt and its Servicing: This is the major positive improvement. While the national debt itself isn’t being reduced (other than by not growing), the cost of servicing that debt is significantly lowered. This frees up substantial fiscal space for other priorities (or further tax cuts) in the future. It reduces the long-term drag of debt on the economy.
The “Boom” - More Plausible, Still Uncertain:
How Big? The potential for a significant increase in GDP growth is higher in this scenario than in the previous ones. The combination of a major supply-side tax cut and lower interest rates, without the full brunt of massive demand-side contraction, creates a more favorable environment for growth.
How Likely? A “massive economic boom” (sustained 4-5% real GDP growth) is plausible. The short-term impact of the spending cuts would still be negative, likely leading to a recession, but a shallower one than in the previous scenarios. The medium- and long-term outlook is more positive, provided the economy can navigate the initial shock. The distribution of the benefits would still be highly unequal, favoring high-income earners.