March 25, 2019

News Analysis: No, Trump’s Tax Cut Isn’t Paying for Itself (at Least Not Yet)

The fiscal year runs from the start of October to the end of September. The tax cuts mostly took effect in January 2018. That means three months of the 2018 fiscal year included a period without the tax cuts in place. If you look only at the nine months after the cuts took effect, you’ll see that revenue is ever so slightly down, year over year: From January through September 2017, revenues were $2.57 trillion. For the same period in 2018, they were $2.56 trillion. Which is to say, they’re down by $10 billion, in a direct comparison after the tax cuts started. Personal tax receipts are up on their own, but corporate tax receipts are down by about a third from a year ago.

That overall drop looks worse when you consider inflation. A dollar today buys about 2 percent less than it did a year ago, according to the inflation index used by the Federal Reserve to set monetary policy. So the government brought in slightly less money year over year, and that money was worth less than the equivalent amount a year ago, which means it buys fewer meals for troops, materials for highway construction or any of the other goods and services that tax dollars go toward.

When the tax law passed, members of Congress had all sorts of evidence suggesting it would accelerate America’s growing budget deficits. The Joint Committee on Taxation and the Tax Policy Center predicted that the new law would add at least $1 trillion to deficits over the next 10 years, even after accounting for additional economic growth. The Penn Wharton Budget Model predicted it would add $2 trillion. The most optimistic mainstream model that analyzed all the provisions of the new law, from the Tax Foundation, predicted it would add about $450 billion to the deficit after accounting for additional growth.

Republicans dismissed those warnings. Treasury Secretary Steven Mnuchin said he expected the new law to more than pay for itself — it would help to reduce future deficits. It’s possible that optimism could turn out to be right, but only if the tax cuts unleash a sustained boom in productivity and economic growth, and with them, much higher revenues than we saw this past fiscal year. In other words, we’re going to need to make — and sell — a lot more loaves.

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