Republicans favorite meme is that tax cuts spur economic growth, thereby increasing tax revenues and as a result pay for themselves. The only problem is the facts just don’t support the meme.
The release of Trump’s tax plan comes with an expected debate and a familiar question: do tax cuts pay for themselves? The answer is, probably no,. But this doesn’t stop people from bringing up this argument when tax reform is proposed. I mean, you can’t blame them – cutting taxes boosts economic growth, which increases taxable income, and therefore increases revenue collected.
However, this logic is too simple and doesn’t account for other factors that impact the federal budget. It’s not a political issue, it’s simply fact. According to Politifact,“there’s no real evidence in the last 20 years that growth from tax cuts has made up lost revenue.”
This article will explain why tax cuts and overall tax reform can make the economy more efficient, but tax cuts in and of themselves don’t balance budgets.
Republicans are right that tax cuts spur economic growth and tax revenues increase. As long as the economy is expanding. But so does government spending.
It’s nice to talk about theory, but is the math behind self funded tax cuts even feasible? How much economic growth will you need to make up for lost revenue? When will you break even? Well, we talked about the theory, so let’s dive into the numbers.
Lets start with the revenue side of the equation. Since the 1940’s the federal government has collected, on average, 17% of Gross Domestic Product (GDP) annually. This means that for every dollar of GDP, the US government collects 17 cents through individual, corporate, payroll, and excise taxes.
It’s estimated that Trump’s tax plan could cost anywhere from $3 trillion to $5 trillion over the next decade. So, essentially, Trump’s tax plan would have to generate $17.6 trillion to $29.4 trillion over the next decade in additional GDP growth. How did I come up with these numbers? Simple, if the US government collects taxes approximately 17% of GDP, then you would need $17.6 to $29.4 trillion in additional GDP to make up for the loss in revenue.
Assume that the current economy is growing at an average annual rate of 2%. If you gave a $5 trillion tax cut over the next decade, you would need to generate consecutive growth of 4.4% over the next decade. If you were more conservative and gave a $3 trillion tax cut, then you’d only need consecutive annual growth of 3.5%. If you give a $2 trillion tax cut, then you’d only need 1% more growth in GDP year after year.
These growth rates seem achievable, especially considering the most recent quarter of GDP growth at 3%. But is the math really this simple? Proponents of self funding tax cuts would say yes and leave it at that. But there is another side to the equation – government spending.
Like tax receipts, federal spending has a direct relationship with GDP. On average, federal spending has been at or around 20% of GDP over the last few decades. So what does that mean? Well, simply put, if your tax receipts are 17% of GDP and your outlays are 20% of GDP then you’ll have a budget deficit each year of about 3% of GDP.
If the entire point of tax reform is to reduce the amount of taxes the government collects as a portion of GDP, then you’ll always run a deficit. Even if federal spending decreases on its own due to fewer people collecting government assistance, you’ll still run a significant deficit year after year. Why is this?
Well, with a bigger economy comes increased cost simply due to inflation. Since many government assistance programs are tied to the consumer price index, government spending will naturally increase year after year. Same goes with wages for government employees, equipment purchased through military spending, and even interest paid on federal debt.
Simply put, tax cuts do not pay for themselves because they don’t offset increased government spending. Don’t believe me? Well, just look at the data – even with periods of strong growth, the last time federal spending was below 17% of GDP was 1966.
Does ANYONE actually believe our government (or general populace for that matter) has the discipline or smarts to correct the error of the past 53 years? My vote is an emphatic NO.
Rep. Kevin Brady (R-Tex.), a primary architect of the GOP tax bill, has acknowledged that the tax cuts may not fully pay for themselves. It is very likely that Mr. Brady has known the aforementioned facts all along, as has his fellow republicans, but winning elections is ALL that matters to present day republicans. And Trump is a present day republican on steroids. So, get prepared for continued spiraling deficits and an ever bloated and bulging federal debt.
The Washington Post – Rep. Kevin Brady (R-Tex.), a lead architect of the GOP tax bill, suggested Tuesday the tax cuts may not fully pay for themselves, contradicting a promise Republicans made repeatedly while pushing the law in late 2017.
Pressed about what portion of the tax cuts were fully paid for, Brady said it was “hard to know.”
“We will know in year 8, 9 or 10 what revenues it brought in to the government over time. So it’s way too early to tell,” said Brady at the Peterson Foundation’s annual Fiscal Summit in Washington D.C.
The federal government’s deficit typically shrinks during strong economic times, but the deficit is up nearly 40 percent so far this fiscal year, according to the latest Congressional Budget Office report released Friday.
Spending is up $255 billion for the first eight months of the fiscal year, the CBO said, while revenues are up only $49 billion. Corporate tax receipts are down after Republicans enacted the largest reduction in business taxes in U.S. history. Individual income taxes are basically flat this year (they are growing less than the rate of inflation). Most of the revenue increase is coming from President Trump’s tariffs and more payroll taxes, which were not cut in the tax bill.
“Revenue fell, it didn’t rise, after the tax cuts,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.
Brady’s comments are a marked departure from the claim many Republicans made during the tax bill debate that the tax cuts would be fully paid for by additional economic growth that would, in turn, spur additional tax revenues for government coffers.Numerous independent analyses concluded that the tax bill would add substantially to the U.S. debt, which currently stands at $22 trillion. CBO estimated the total cost of the Tax Cuts and Jobs Act is $1.9 trillion — after taking into account additional growth and interest payments.