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The American Compass Budget Approach: A Multi-Trillion-Dollar Tax Increase, Dodges Most Critical Fiscal Challenges

Posted: Jun 5, 2024

Today, American Compass released a paper that models two approaches to federal budgeting that are completely divorced from the key budgetary challenges confronting federal policymakers and, to a surprising degree, the policies otherwise espoused by American Compass. The Compass budget approaches, despite purporting to be a budget grounded in reality, dodges addressing the expiration of the TCJA, the insolvency of Medicare and Social Security, and growing global threats.

The most significant budgetary issue facing Congress in the near term is the pending expiration of the individual components of the Tax Cuts and Jobs Act (TCJA). Under current law, the individual income tax provisions of TCJA, which include lower rates, expanded tax brackets, a doubled standard deduction, and an expanded child tax credit, expire at the end of 2025. The expiration of these provisions would amount to an across-the-board income tax increase of $3.3 trillion

Circumstances vary by taxpayer, but this would amount to a significant tax hit to working Americans. The Tax Foundation has modeled some of these impacts. For example, a single parent with two children making around $50,000 would see their tax bill increase by nearly $1,500. A married family of four making $85,000 would see their tax bill go up by over $1,600 per year.

President Biden has pledged to substantially retain these provisions, and certainly a President Trump is committed to preserving them. Likewise, Chairman Jason Smith of the Ways and Means Committee has launched an effort to “avert the 2025 tax cliff.” Quite plainly, this is the most important budgetary issue confronting policymakers in the coming year. 

How does the American Compass budget grapple with this challenge? It doesn’t. It lets the TCJA completely expire. This makes the math easier, but it renders a credible “conservative” budget useless to the most pressing budgetary issue of the day. 

The American Compass budget is not silent on tax policy, however. In addition to letting average tax rates on American increase across-the-board, the Compass budget approach would raise both the corporate tax rate and tariffs on imported goods. The more aggressive budget approach would impose a global 10 percent tariff and raise the corporate tax rate as has been proposed by the Biden administration. These policies alone would amount to a near $4 trillion tax increase. The tariffs would fall particularly hard on American consumers. The Peterson Institute has estimated that this proposal would amount to a $1,700 tax increase on middle class families.

Further, the Compass budget largely avoids specificity on the spending side. Despite the fact that Medicare and Social Security drive nearly the entire deficit over the near and long term and are both on track to see their respective trust funds exhausted, these programs bare a minority share of the deficit reduction proposed in the Compass budget proposals. Rather, under the most aggressive budget approach proposed by Compass, primary spending reductions total about $1.4 trillion in 2034. Of these, only about 19 percent come from the largest entitlement programs. The balance of spending reductions stem largely on caps on categories of spending with helpful specificity such as “everything else.” These are quite simply not serious policy proposals.

Importantly, the Compass budget relies on defense cuts at a time of significant global disorder and growing international threats from near-peer rivals such as China and Russia. Capping future defense funding in this context is similar to the Compass budget punt on the TCJA and entitlements. Whereas conservative national security leaders such as the ranking member of the Senate Armed Services Committee, Sen. Roger Wicker (R-MS), recognize the need to reinvest in our national defense capabilities, for the purpose of their budget, American Compass would reduce readiness. This is not just at odds with sound policy, it’s also somewhat at odds with past American Compass efforts to promote industrial policy.

The upshot of the American Compass budget approach is that it is very specific on its middle-class tax increases and relies on increasing vagary on the spending front. It elides the three most pressing budget challenges facing policymakers. It may be a budget, but it’s not a budget tethered to our current fiscal policy or national security challenges.