No, The Republican Tax Cuts Aren’t ‘Paying For Themselves’

Contrary to the promises of December 2017, the Republican tax cuts are not paying for themselves. Instead, they are helping lead us to trillion-dollar deficits.

tax taxes pig piggybank dollar signs chalkboard
Photo by GotCredit under CC BY 2.0 license from pxhere.

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.

FILED UNDER: Congress, Deficit and Debt, Donald Trump, Economics and Business, Politicians, Taxes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Jay L. Gischer says:

    The next time you want to complain about how Warren won’t talk about how to fund “Medicare for All”, please remember this. Since 1980 or so, Republicans have been spreading a lie that sounds like “tax cuts will pay for themselves”. This lie has worked well enough to advance their agenda and put Trump in the White House.

    Meanwhile, dating from Clinton, Democrats have embraced PAYGO and have not busted the budget. That isn’t going to suddenly change with a Warren administration. Or a Biden administration or even a Harris or Buttagieg one. I don’t have a good read on Sanders, but I guess it would be the same. Because the legislators are the same.

    Meanwhile, most of us are already paying for health care, and bringing in the last few who can’t pay will cost us money which is large in absolute terms, but maybe not so much when compared to our current annual tax bills.

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  2. Moosebreath says:

    “No, The Republican Tax Cuts Aren’t ‘Paying For Themselves”

    Nor did Bush the Younger’s. Nor did Reagan’s. As the saying goes, doing the same thing again and expecting different results is the definition of insanity.

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  3. The reason that the budget deficits shrank in the Clinton and Obama eras is, I would submit, because we had divided government. Regardless of which party you’re talking about, the temptation to go on wild spending sprees is simply too great. The American people seem to recognize this fact.

    As for the other points that have been raised, yes it’s true that deficits went up during the Reagan years but there was at least a good reason for that The first was related to the recession that was going on at the time Reagan took ofice, and which took a double dip headed into 1982. The second was due to military spending necessitated to rebuild a military that had been allowed to languish in the time since the Vietnam War had ended. The economy is also the reason the deficit went up during the first couple years of the Obama Administration.

    The problems came with Bush 43 and Trump when taxes were cut and spending increased for no good reasona at all.

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  4. Kathy says:

    The Devil is, as usual, in the details.

    There is an optimal level of taxes, which depends on the level of government expenditures, services, and even collection schedules, as well on the kind and level of economic activity. It will also vary in times of recession or depression.

    So it may be that a too-high tax level constrains economic activity and growth. But a too-low level either reduces government services or increases debt.

    There’s also the matter of economic growth itself. A growing economy produces more in goods and services than it did the year before that, and will show an increase the next year.

    Why is this good? Well, in part because the population itself is growing, so you need more stuff and more services. If a 100 million people, for example, use 61 million cars, then 200 million people, all other things being equal, need 122 million cars.

    But you’d think there’s a limit. Eventually population growth slows down. It may stop altogether, so the population no longer grows. And there are cases of negative population growth, so the population decreases slowly over time. What point to economic growth then?

  5. Jay L Gischer says:

    @Doug Mataconis: Reagan embraced exactly the same lie: “Tax cuts pay for themselves”. That’s my point.

    Yes, I expect deficits to go up during recessions. I think we didn’t borrow enough money during the Great Recession, because of the austerity types who fell silent the moment Republicans grabbed the White House.

    I think that divided government is definitely a factor, but I would not dismiss the work that the Democratically held government did to manage the fiscal impact of Obamacare. They did a lot.

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  6. mattbernius says:

    Don’t work, the moment a Democrat (especially if they are a woman or minority) wins the Presidency, the Tea Party will begin a moral panic around the gigantic deficit the Democrats created.

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  7. Blue Galangal says:

    @mattbernius:

    Don’t work, the moment a Democrat (especially if they are a woman or minority) wins the Presidency, the Tea Party will begin a moral panic around the gigantic deficit the Democrats just created.

    FTFY.

  8. Scott says:

    The tax cuts have put us into such a deep hole that we could eliminate the entire government except for defense, medicare, and Social Security and still have a deficit. Yet there are those (including my congressman) who totally insists that it is spending that is the issue, not revenue.

    Federal receipts as percent of GDP is now 16.2% in 2018, down from 17.8% in 2015.

    Federal expenditures as percent of GDP is 20.5%, slightly up from 20.4%.

    Guess which is driving the deficit.

    Personally, I think we need to go back and find a way to finance the $5T bill for our last 18 years of war. Should never have put it on the credit card.

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  9. Mikey says:

    This is my shocked face. 😐

  10. grumpy realist says:

    Everyone wants the services, but not all are willing to pay for them.

    The other fly in the ointment that far too many blissfully ignore is that it takes a lot of running to stay still, financially. Infrastructure doesn’t maintain itself, nor is there anything like the Infrastructure Fairy who comes down and makes everything new again. We need to invest–which requires money–which requires taxes.

    I’d prefer we put money into infrastructure and R&D–and yes, raise taxes. We’ve forgotten noblesse oblige–those to whom much has been given should contribute more to the good of society. Which means higher estate taxes, higher (progressive) income taxes, and a more equal treatment of earned income vs. return on capital.

  11. Daryl and his brother Darryl says:

    @Doug Mataconis:

    the Laffer Curve

    Hard to take anything that takes the Laffer Curve seriously, seriously…but whatever.

    The reason that the budget deficits shrank in the Clinton and Obama eras is, I would submit, because we had divided government.

    This is, without question, true. And I think it’s a good thing. I’ve always been an advocate of divided Government.
    I think the Republicans were over the top in their opposition to Obama, which dramatically slowed the recovery, but that’s another discussion.
    What is beyond question is that the recovery led to a resilient economy that, to date has been able to withstand the shocks that Trump has given it. And this with Obama increasing taxes on the rich, which Republicans promised us was going to crash the economy.
    We need to finally admit, as a nation, that Republican economic theories DO NOT WORK. Never have, never will.
    And also, as a nation, we need to figure out how we are going to deal with Trumps debt, without cutting entitlements and social safety net programs.
    Do we need a military budget that is 1/3 of our total budget?
    Does it make sense that Jeff Bezos, a major beneficiary of this nation’s vast infrastructure, pays absolutely zero towards the maintenance and repair of that infrastructure?
    We need to get beyond Republican dogma if we are going to fix any of this.

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  12. Gustopher says:

    The next time you want to complain about how Warren won’t talk about how to fund “Medicare for All”, please remember this.

    Medicare For All will pay for itself because of a less-sick, more-productive work force will work harder, make more money, and pay taxes on that more money.

    The problem with the Laffer Curve isn’t that it’s wrong, it’s that it assumes a healthy workforce.

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  13. Dave Schuler says:

    I’m unsurprised. I supported the cuts in the corporate income tax because it’s a very inefficient tax and we were out of step with practically every other developed economy in that area. The results of that have been disappointing.

    I opposed the cuts in the personal income tax because of, well, what has happened. It hasn’t done much to stimulate the economy (that’s just not the way that Keynesian stimulus works) and it has increased the deficit as you note.

    Tax cuts are the one thing on which all Republicans seem to agree and at this point that dog just don’t hunt, at least not cuts in the personal income tax rates. The tax cut that really should be considered is in the payroll tax but that’s heresy.

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  14. steve says:

    Doug- They arent going to cut spending. If they cut taxes but maintain or increase spending, that is called a stimulus under other circumstances. The GOOP really wants us to believe that cutting regulations and taxes on the wealthy increases economic growth. We probably did see a little bit of short lived growth (nothing like the GOP predicted) but at the cost of deficits. Almost anyone can improve growth if you make it deficit financed. However, it makes for great electoral politics. You cut taxes and give people free stuff and down worry about deficits until a Democrat is back in office.

    Steve

  15. gVOR08 says:

    The first (reason the deficit went up under Reagan) was related to the recession that was going on at the time Reagan took ofice, and which took a double dip headed into 1982.

    There is no reason for passive voice there, it didn’t just happen. The Fed Chair, Paul Volker, with Reagan’s assent, deliberately kicked the economy, which had been recovering, into the second dip. And they didn’t let up until the Mexican banks threatened to collapse, forcing Volker to loosen.

  16. gVOR08 says:

    There a few problems with the Laffer Curve. The first is that Laffer didn’t invent it and he didn’t understand it. Economists had known for decades that the revenue optimizing top rate for the income tax was around 75%. This is, not coincidentally, about where Kennedy lowered it. Kennedy’s supply side tax cut worked. No Republican cut has. There seems an obvious moral there somewhere.

    Also, did a conservative Republican really mean to say that tax rates should be set to maximize revenue? In general, shouldn’t rates be the lowest that will generate the necessary revenue? Other purposes may also make sense. The old confiscatory rates did tend to reduce the number of people with too much money, like Koch, Mercer, Adelson, etc., screwing with our politics.

  17. Chip Daniels says:

    @gVOR08:
    If we were serious about “running government like a business” then yes, we would set tax rates at that which produces the highest revenue.

  18. Slugger says:

    Tax cuts have a variety of effects. We are 330 million people with a broad spectrum of means, needs, and wants. The Trump tax cut put money in some peoples’ pockets. At the same time others have been hurt by the reductions in programs that are secondary to the cuts. We need some honest accounting-who benefitted/who got hurt. I fear that we have so much partisanship that we’ll never see such an analysis.
    Trump has managed to calm our concerns about Obama spending too much time golfing. Let’s give him credit.

  19. Sleeping Dog says:

    When Rethugs begin talking about balancing the budget by cutting and/or privatizing Social Security and Medicare, remind them that those programs have a (supposedly) dedicated funding source through the payroll tax. The payroll tax revenue can not be (ethically) captured to pay down the debt. Any reduction should result in a decrease in the payroll tax.

    SS and Medicare are ledger items in the budget, but most voters don’t understand that and believe that these are tied directly to the payroll taxes that they pay.

  20. gVOR08 says:

    @Sleeping Dog: SS has a file cabinet full of gov’t bonds representing money SS loaned to the Treasury. This is what paid for our credit card wars and tax cuts. Those bonds are backed by the full faith and credit of the United States.
    Whatever that means to Republicans. I’m not sure ethical has much to do with it for them.

  21. SC_Birdflyte says:

    Those who control political rhetoric control the argument. Therefore, I suggest that any future discussions of tax policy should refer to “the Laughter curve,” because it’s a real hoot.

  22. @Doug Mataconis: Doug, please see how the Democrats constrained their major Obama era policy initiative (the ACA) to get to at least CBO scored budget neutrality before you praise both-side-ism.

    The politically most effective tactic for the Democrats in 2009 was to turn on a firehose of federal money at both states and upper middle class beneficiaries with no new taxes nor Medicare formula changes. That is not what they did despite having 60 votes in the Senate and 250+ votes in the House.

  23. Just nutha ignint cracker says:

    “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.”

    Well then it sure is fortunate that Congress had the foresight to make the tax cuts on the middle class temporary, isn’t it? In terms of taxation, the middle class is “where the money is,” so they’ll need to step up and get us out of this mess that their greed caused.

  24. Just nutha ignint cracker says:

    @Jay L. Gischer: Just a slight nit to pick at in your comment. Most of us aren’t already paying for health care. The corporations we work for are providing health care coverage for us.

  25. grumpy realist says:

    @Daryl and his brother Darryl: I’m toying with the idea that companies should be charged for the access to the market that the country provides. No company would be viable were it not for customers, and in fact customers who can afford to pay for the company’s products.

    Similarly, companies take advantage of a heck of a lot of the U.S.’s and international infrastructure. Those cheap Chinese products wouldn’t be making it here unless we had cheap and reliable maritime transport, harbors that allowed quick and easy unloading, links to rail and trucks, the railroads and highways, etc. etc. and so forth. And then, of course, a population of individuals who can afford the goods in the location the goods are being sold.

    At present, our attitude towards all of the above is that we take it for granted. It’s a part of the equation that we expect will always exist and which “shouldn’t be paid for”, regardless of how important it is to the overall economy. We just wave our hands when parts of industrial chains get automatized out of existence and mutter something about too bad for the human workers and they should go get some retraining.

    So what happens when the bulk of work is taken away from humans and given to robots and AI? In a socialist utopia, the benefits would be distributed equally among all humans, but you’d have to be very naive to believe that’s what’s going to happen in real life. We’re going to get a small population of rich manufacturers owning a lot of capital….and the rest of the population will likely to be subsistence farmers who every now and then manage to save up for one of the products the manufacturers produce. Domestic consumables (such as toilet paper) are probably going to be unaffordable unless they get much cheaper.

    SOMEONE isn’t thinking that clearly.

  26. Daryl and his brother Darryl says:

    @Just nutha ignint cracker:

    Most of us aren’t already paying for health care. The corporations we work for are providing health care coverage for us.

    Sure…but the fact is that they are paying your insurance premium instead of paying you cash…by all rights if there is M4A or something like that, then your wages should increase by the cost of your insurance benefit. Of course your taxes will too, to pay for M4A.

  27. Just nutha ignint cracker says:

    “… then your wages should increase by the cost of your insurance benefit.”

    And you honestly believer that will happen? Really?

    You may be right about the “should” part, but I don’t see it happening. Not. At. All.

  28. DrDaveT says:

    @Just nutha ignint cracker:

    And you honestly believe that will happen? Really?

    Yes. We had this conversation already in a previous thread. It will take a while, but the new equilibrium will feature very similar total compensation to the current equilibrium. Possibly even higher than current for people with expensive insurance today, depending on how expensive M4A premiums turn out to be.

    Employers pay the wages the have to pay to compete in the labor market. Unless they have some kind of monopoly power (e.g. Company Town), wages end up approximately at the point where the marginal cost of higher wages equals the marginal lost revenue from having crappy workers. This point is nearly independent of how compensation breaks out between wages, bonuses, benefits, etc.