Win-Win: How Tax Reform Will Help Defense Spending and the Economy - Peter Huessy

by Peter Huessy

Unfortunately, there remains a widely held assumption that unless tax reform is "revenue-neutral," deficits will increase.

• While America's adversaries have been increasing their defense budgets and the power of their armed forces, the United States has been doing the opposite.
• Although the Senate and House Armed Services Committees passed a bill for 2018 that would exceed President Trump's defense budget request, there is still the problem of the 2011 Budget Control Act, which caps defense spending at an extremely low level. Modernization has been curtailed significantly.
• Unfortunately, there remains a widely held assumption that unless tax reform is "revenue-neutral," deficits will increase. The trouble with this assumption is that although revenue-neutral tax reform may make the system more efficient or fair, it neither increases government revenue nor generates additional investment in the private sector. The purpose of the new tax-reform plan is to do both: increase revenue and spur economic growth at the same time.

One crucial aspect of the new tax reform bill, unveiled by President Donald Trump and the "Big Six" group of Republican tax negotiators at the end of September, is the potentially positive effect it will have on the US defense budget, which is sorely in need of an increase.

The assertion made by former President Barack Obama during his final State of the Union address in January 2016, that the United States spends "more on our military than the next eight nations combined," bolstered the belief that America's national-security needs are beyond being met. However, as a recent Heritage Foundation report reveals, such claims, which have led to the conclusion that the United States allocates an excessive amount to the defense budget, are "disingenuous," as they "give no consideration to the decisions driving defense spending or the factors contributing to costs across national economies."

As the Heritage Foundation points out, although "the U.S. military remains the largest and most capable in the world... [t]he security environment in which in which the U.S. military is expected to operate has grown increasingly complex, and national defense resourcing warrants more than a solitary sentence of discussion."

America's major military adversaries, Russia and China, pay their soldiers, sailors and pilots far less than America pays the members of its own forces, which enables Moscow and Beijing to spend more on weapons and research. In addition, unlike the U.S., Russia and China are not transparent about their defense spending at best, and lie about it at worst, with the former reportedly "cooking its defense books," and the latter publishing nothing about its nuclear weapons program. In addition, while America's adversaries have been increasing their defense budgets and the power of their armed forces, the United States has been doing the opposite. As former US Senator James Talent wrote in 2013:

"...[T]he picture isn't pretty. Congress and the president [Obama] will probably agree to increase defense spending by a small amount, but they will probably also take money away from future defense budgets. This will allow them to say that they have increased defense spending while in reality the wholesale unraveling of American power will continue."

In addition -- according to USAF Maj Gen Garrett Harencak -- during decades of a "procurement holiday," America failed to upgrade its nuclear-deterrent capabilities.

This is the bad news. The good news is:

"For the first time in nearly 35 years, the United States is back on track to modernize its entire nuclear deterrent. After previously approving the building of 12 new Columbia class submarines and a new B-21 nuclear-capable bomber, the United States has selected two contractors to compete to build the next land-based intercontinental ballistic missile (ICBM) nuclear deterrent. This would be the first new land-based ICBM since the Peacekeeper missile was deployed in 1986 and completes a nuclear modernization effort plan promised by the administration."

Unfortunately, however, the defense budget as it stands is not adequate to support the plan. Although the Senate and House Armed Services Committees passed a bill for 2018 that would exceed President Trump's defense budget request, there is still the problem of the 2011 Budget Control Act, which caps defense spending at an extremely low level. Even with an upward adjustment in 2014-15, the shortfall has remained, and modernization has been curtailed significantly.

The situation is further complicated by the current federal deficit, which approaches $600 billion annually. With infrastructure investment requirements and significant multiple billions now needed for hurricane relief, it is not surprising that much of the accepted narrative is that extra money for the military is impossible under these circumstances.

This conventional wisdom is wrong, however. Historically, tax reform has secured more, not less, revenue for the federal government -- and the current plan would be no different, thus enabling a restoration of military spending. Unfortunately, there remains a widely held assumption that unless tax reform is "revenue-neutral," deficits will increase. The trouble with this assumption is that although revenue-neutral tax reform may make the system more efficient or fair -- as was the aim of the Tax Reform Act of 1986 -- it neither increases government revenue nor generates additional investment in the private sector.

The purpose of the new tax-reform plan is to do both: increase revenue and spur economic growth at the same time. Months before it was proposed, however -- and it has yet to be reviewed thoroughly, debated or passed by Congress -- the Congressional Budget Office already projected an annual revenue increase of $160-$212 billion over the next decade, even with a low 2.1% average economic growth rate. A 3% growth rate created by tax reform would increase revenue by a hefty $350 billion annually. This means that it would be possible to increase defense spending by $60-70 billion per year, an increase of 11% over current spending, which is lower than the 13.2% increase in defense spending that Congress approved in 1997-2000 -- while the country was also undergoing welfare reform, balancing the budget and implementing tax cuts.

To attract sufficient votes in Congress to pass the current bill, defense-spending increases should probably be coupled with additional private and public funding for cyber- and border-security, long-term health care research, and nationwide infrastructure improvement.

It is time that the false notions that America neither needs an increase in defense spending, nor can afford it, are put to rest.

(Image source: U.S. Navy)

Dr. Peter Huessy is President of GeoStrategic Analysis, a defense consulting firm he founded in 1981, as well as Director of Strategic Deterrent Studies at the Mitchell Institute for Aerospace Studies. He was also for 20 years, the senior defense consultant at the National Defense University Foundation.

Source: https://www.gatestoneinstitute.org/11108/defense-spending-economy

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