When Republicans passed the Tax Cuts & Jobs Act in December 2017, one of the many promises they made about the package is that it would “pay for itself” in that the increased revenue it would bring into the Treasury Department would offset any lost revenue due to the lower rates for corporations. As it turns out, that has not been the case at all:
After two years, President Trump’s tax cuts are not on track to pay for themselves, the latest Treasury data released Friday suggest.
Total federal government revenues ended up lower in 2019 than was projected before the passage of the GOP tax overhaul in 2017.
Then, in 2017, the nonpartisan Congressional Budget Office projected that fiscal 2019 revenues, without the tax cuts, would be $3.69 trillion. Instead, revenues with the tax cuts were only $3.46 trillion.
To be certain, the difference, $225 billion, cannot be attributed solely to the tax cuts. Other economic factors have influenced economic growth over the past two years. For example, the tariffs put in place as part of Trump’s trade wars likely counteracted the stimulative effect of the tax cuts.
And, in fact, the $225 billion shortfall against projections is better than would have been expected if the tax cuts were the only consideration. The Joint Committee on Taxation, a nonpartisan group of experts that provides tax estimates for Congress, reckoned at the time the tax law was being written that it would lower 2019 revenues by $280 billion.
The committee also estimated, though, that the tax law would not pay for itself. It reckoned that the tax cuts would add about $1.5 trillion to deficits over the course of a decade. Friday’s data suggest that tax revenues are coming in roughly in line with those projections, not living up to the much more optimistic picture painted by Republicans at the time of passage, which would require tax receipts to surge.
Treasury Secretary Steven Mnuchin said during the push for the tax cuts and as recently as last month that they would pay for themselves by generating economic growth.
Payroll taxes are higher than projected, as are tariffs, but corporate and individual income taxes are lower.
Multiple economists told the Washington Examiner that they were confident that the tax bill has increased the federal deficit and is not on track to pay for itself.
“The federal government is borrowing a trillion dollars in good times, so we’re in real trouble when the bad times come,” said Marc Goldwein, senior policy director for the nonpartisan Committee for a Responsible Federal Budget. “It tells you the [tax law] is a significant contributor — a quarter of our $1 trillion deficit. Was that worth it for large corporate tax cuts?”
There is not likely to be much immediate harm from these deficits, Goldwein said, but the harm will be felt in the long run.
“Deficits are the deferral of pain, where the consequences play out slowly over time, but the costs are real,” Goldwein said. “Everyone enjoys the lower tax cuts today, but your kids are going to pay for it tomorrow with lower incomes, more interest on the debt.”
Anyone who paid attention to anything other than the positive Republican Congressional and White House press releases would not be surprised by this. When the package was being debated, Republicans were all over the media promising that passing the package, which included reductions in both personal and corporate income tax rates, would lead to a stronger economy, job growth and increased revenue to the Federal Government. While there have been some positive economic statistics on an isolated basis, those promises have gone largely unfulfilled. Indeed, both economic and job growth have, by and large, remained the same as they were during President Obama’s second term. wage growth, which many economists are now saying is the more important number now that we’re nearing the point of full employment, has been stubbornly slow for the past two years. Meanwhile, the corporate expansions that Republicans said would happen have not materialized and many corporations have been using the tax savings they are receiving from the new tax law to fund stock buybacks. Finally and perhaps most disappointing to Republicans, the changes to corporate taxes have not resulted in the repatriation of corporate profits parked overseas that they claimed would occur in the wake of the tax cuts. Instead, corporations have chosen to keep those profits where they are rather than paying additional corporate taxes as a result of repatriation, even if the tax rate is lower than it used to be.
In addition to a decided lack of apparent economic benefit, the tax cut package has also come with the economic bad news. Just months after the tax bill became law, for example, the Congressional Budget Office estimated that it would add $1.9 trillion to the Federal Budget Deficit over the course of ten years. This came at the same time that, independent of the tax cut bill, it was becoming clear that we were heading back toward the $1 trillion budget deficits we saw at the beginning of the Obama Administration when the economy was still recovering from the Great Recession.
When the final budget deal was put forward in mid-February of last year, it included massive spending increases in almost every budget category and busted through the controls that had been put in place by the Budget Control Act of 2011, a controversial bill passed during one of the many fiscal showdowns between former President Obama and Congress that occurred after Republicans captured the House in 2010.
As The New York Times noted at the time, this effectively means that Republicans have learned to love the deficits and debt they once claimed to abhor. In other words, the Republican Party, which had spent the Obama years railing about spending and deficits, had become the party of deficits and debt. By April of last year, the Congressional Budget Office had officially forecast that we’d be seeing trillion dollars deficits by the end of Fiscal Year 2019 and just a few months later, the national debt crossed a new benchmark and was north of $21 trillion. Most recently, it was reported that the budget deficit for the just-concluded Fiscal Year had ended up just short of $1 trillion, with the promise that it would exceed that number well into the foreseeable future.
There are ways that this could have been prevented. That tax cut package itself could have been designed differently in a way that would have allowed for it to generate more revenue, for example. The better idea, though, would have been for Congress to refrain from increasing spending at the same time it was cutting taxes. Notwithstanding whatever economic theory may say, the reality has been that for tax cuts to really work their magic, they need to be accompanied by spending cuts designed to offset the lost revenue from those cuts. Otherwise, you end up with higher deficits, higher national debt, and the economic drag they create. This is especially true in the modern era where the top marginal tax rates are at such levels that lowering them puts us on the downward side of the Laffer Curve where decreased tax rates lead to decreased revenue. Instead of lower spending, though, the first two years of the Trump Administration have led to higher spending, which in turn has had an adverse impact on the budget deficit. Only when we get spending under control can we expect to see revenues and spending come to something close to that balance that is needed to end deficit spending. Until then, we keep heading down the road toward a future that won’t be pretty.
