Earlier this month, the United States Treasury Department announced in its monthly report on government receipts and outlays that the federal deficit—the gap between what the U.S. government spends and the revenues it receives—for the months of October of 2018 through January of 2019 was $310 billion, a 77 percent increase over the same time period last year. The reason for the increase is simple: tax revenues fell and government spending increased.
This is not surprising. Pretty much every credible economic model has projected that the federal deficit—and, thus, debt—would increase. Back in January, the Congressional Budget Office projected that the annual deficit in 2019 would hit $900 billion, and start to top $1 trillion beginning in 2022. (This projection actually represented a slight improvement on previous ones, which predicted the deficit would be $75 billion higher in 2019.)
The drivers of the deficit are also not a mystery. In 2017, the GOP-controlled House of Representatives and Senate passed the Tax Cuts and Jobs Act, which dramatically cut tax rates and which credible economists uniformly predicted would decrease government revenues and increase deficits. Shortly thereafter, Congress negotiated a budget deal that significantly increased government spending. This chart, pulled from data from the Committee for a Responsible Federal Budget, illustrates the drivers of the deficit:
The tax cuts and the 2018 budget agreement cumulatively account for 46 percent of the projected 2019 deficit.
Republicans and the Trump administration continue to echo the argument they made in 2017 that the TCJA would pay for itself (or is already paying for itself) by unleashing revolutionary economic growth. This argument persists in the complete absence of any economic models or data supporting such claims. Even the most flattering economic model of the TCJA’s effects—produced by the Tax Foundation, a tax policy non-profit—didn’t project enough economic growth to cover the costs of the legislation.
In a post published late last week, William G. Gale, the co-director of the Tax Policy Center, a center-left think thank, and a Council of Economic Advisors economist under President George H.W. Bush, and Aaron Krupkin, a research analyst at TPC, take aim at the claim that the law is already beginning to pay for itself. While some boosters of the law have pointed to slightly higher tax revenues in fiscal year 2018 as evidence of the law paying for itself, the researchers argue that measuring the effects of the TCJA requires comparing what revenues would have been in the absence of the law to what they actually were.
“[T]he actual amount of revenue collected in FY2018 was significantly lower than the Congressional Budget Office’s projection of FY2018 revenue from January [of] 2017—before the tax cuts were signed,” Gale and Krupkin write. “The shortfall is $275 billion, or 7.6 percent of revenues that were expected before the tax cuts took place. Given that the economy grew, unless one can find some other change that caused a large revenue loss, the data imply that TCJA reduced revenues … substantially.”
The figure below, collating data from Gale and Krupkin’s post, illustrates how three different revenue sources in fiscal year 2018—corporate income taxes, which the TCJA cut dramatically; individual income taxes, which the TCJA also cut; and payroll taxes, which were largely unaffected by the bill—compare to what they likely would have been in the absence of the legislation.
Both individual and corporate income tax revenues were quite a bit lower than they were projected to be before the law was passed. (The report published by the Department of the Treasury earlier this month also noted a meaningful decline—over 20 percent—in corporate tax revenues.) The TCJA, in other words, has not begun to pay for itself yet.
How about the other argument frequently proffered by TCJA boosters that the law will pay for itself thanks to blockbuster future economic growth? In testimony last week before the House Ways and Means Committee, Secretary of the Treasury Steven Mnuchin reiterated this argument, maintaining that, “if we do get the growth we expect, they [the tax cuts] will pay for themselves.”
The administration detailed just what those growth expectations are earlier this month in the president’s fiscal year 2020 budget. The administration is projecting average real economic growth of at least 3 percent per year through 2024, and 2.8 to 2.9 percent per year growth through 2029. (As Jim Tankersley of the New York Times notes, however, these optimistic Trump administration projections rely on “additional rollbacks in labor regulations, a $1 trillion infrastructure plan and another round of tax cuts,” without which economic growth would slow to approximately 2 percent per year.)
Independent economists, however, are highly skeptical of the administration’s growth projections. The CBO projects economic growth of 2.3 percent in 2019, and average growth rates of 1.7 to 1.8 percent through 2029. In its most recent economic growth projections, released on Wednesday, the Federal Reserve reduced its 2019 growth projection to 2.1 percent from 2.3 percent, and expressed reservations about some economic indicators in its Federal Open Market Committee’s statement.
“[G]rowth of economic activity has slowed from its solid rate in the fourth quarter,” according to the statement. “Recent indicators point to slower growth of household spending and business fixed investment in the first quarter.”
However the next few years bear out, the question of whether the TCJA will pay for itself should inform future legislation. Unfortunately, if history is an indicator, such a hope may be in vain.
Back in the early 2000s, President George W. Bush cut taxes. As most models at the time projected, those tax cuts did not bring in enough revenue to pay for themselves. But back in 2017, in the run-up to the passage of the TCJA, HuffPost’s Matt Fuller interviewed a number of House Republicans who argued the opposite and even cited the Bush tax cuts as a rationale for the TCJA.
The myth that tax cuts will pay for themselves continues to persist within the Republican Party, despite overwhelming evidence to the contrary. Putting this myth to bed may help avoid future budget-busting tax cuts like the TCJA.
