How Much Trump's Tax Cuts Cost the Government
What Are the Costs of the Trump Tax Cuts to You?
President Donald Trump’s administration promised that the 2017 Tax Cut and Jobs Act would add $1.8 trillion in new revenue. That would more than pay for the $1.5 trillion cost of the tax cuts themselves.
The U.S. Department of the Treasury looked at the combined effect of the tax cuts and Trump's Fiscal Year 2018 budget. The budget would boost growth through increased infrastructure spending, deregulation, and welfare reform.
Congress approved the budget and then some. Trump asked for $1.15 trillion in discretionary spending and Congress gave him $1.3 trillion. Congress also added $10.6 billion to Trump’s request for infrastructure spending, amounting to a total of $21 billion.
The Treasury report projected the tax cuts and the budget would boost economic growth to 2.9% a year for the next 10 years.
The report said that prosperity generated by the cuts and the budget would boost tax revenue enough to offset the tax cuts.
Two Other Reports Disagree
The Joint Committee on Taxation analyzed the tax cuts alone. It came to a different conclusion. It said the Act would increase the deficit by $1 trillion over the next 10 years. The Committee expected the economy to grow just 0.7% a year. It did not take into account the other changes in the FY 2018 budget.
It seems most fair to simply look at the effect of the tax cuts. In that case, the Joint Committee’s estimate would be most accurate.
The Tax Foundation came up with a second conclusion. It said the Act would add almost $448 billion to the deficit over the next 10 years. It looked at the effect of the tax cuts themselves and eliminated the Affordable Care Act mandate.
The Foundation said the tax cuts would cost $1.47 trillion in decreased revenue. It would add $600 billion in growth and savings. The plan would boost economic growth by 1.7% a year. It would create 339,000 jobs and add 1.5% to wages.
What Happens If the Cuts Become Permanent
The tax cuts will expire for individuals in 2025. They remain permanent for corporations. In all likelihood, Congress will make the individual cuts permanent when the time comes.
Treasury’s latest analysis includes this scenario. In that case, the tax cuts would cost $2.3 trillion instead of $1.5 trillion over the next 10 years. A Politico analysis found that all additional revenue from increased growth would go toward paying for the cuts. The cost is too high for the tax cuts to pay for themselves. Instead, the deficit and debt would continue to grow.
This increase to the debt means that formerly budget-conscious Republicans have done an about-face.
The party fought hard to pass the sequestration 10% spending cuts. In 2011, some members even threatened to default on the debt rather than add to it. Now they say that the tax cuts would boost the economy so much that the additional revenues would offset the tax cuts.
Why Tax Cuts Won’t Work Now
Supporters of tax cuts believe in the theory of supply-side economics. It says that freeing up businesses to grow more will drive economic growth. When the government cuts taxes or regulations, companies will hire more workers. The resultant job growth creates more demand which boosts the economy.
Supply-side is the opposite of Keynesian theory. It says that consumer demand drives the economy. It supports more government spending on infrastructure, unemployment benefits, and education.
Tax cuts work when the economy is sluggish, businesses need money, and tax rates are high.
For example, the Treasury Department found that the Bush tax cuts gave the economy a short-term boost. But that was because it had been in a recession. Businesses had a lot of extra capacity they could put to use immediately.
According to a 2017 survey, many large corporations said they don’t need the money from the tax cuts. They are sitting on a record $2.3 trillion in cash reserves, double the level in 2001. The CEOs of Cisco, Pfizer, and Coca-Cola would instead use the extra cash to pay dividends to shareholders. The CEO of Amgen will use the proceeds to buy back shares of stock. In effect, the corporate tax cuts would boost stock prices but wouldn't create jobs.
Economist Arthur Laffer found that tax cuts worked best when taxes were high. According to the Laffer Curve, that's called the prohibitive range.
For example, supply-side economics worked during the Reagan administration. But that was because the highest tax rate was 70%. The 2017 tax rates were half of what they were in the 1980s.
Instead, the tax cuts could hurt economic growth because they will increase the debt. Investors see a large debt as a tax increase on future generations. That's especially true if the ratio of debt-to-GDP is near 77%. That's the tipping point, according to a study by the World Bank. It found that every percentage point of debt above this level costs the country 1.7% in growth. The U.S. debt-to-GDP ratio was 104% before the tax cuts.
The Bottom Line
Tax cuts aren't effective at boosting economic growth when the economy is already expanding. They also don't work well when tax rates are below the 50% prohibitive range.
There are three estimates of the cost of Trump's tax cuts:
- The Trump administration said it would generate $1.8 trillion in revenue, more than making up for its $1.5 trillion cost. But it adds the boost to growth from the FY 2018 budget.
- The JCT said it would increase the deficit by $1 trillion. It does not include the impact of the FY 2018 budget.
- The Tax Foundation said the Act would add $448 billion to the deficit. It also includes the impact of eliminating the Obamacare mandate.
If the individual cuts are made permanent, the cost will rise to $2.3 trillion.
U.S. Department of Treasury. "Analysis of Growth and Revenue Estimates Based on the U.S. Senate Committee on Finance Tax Reform Plan." Accessed July 3, 2020.
The White House. "America First: A Budget to Make America Great Again," Page 51. Accessed July 3, 2020.
The White House. "Remarks by President Trump at Signing of H.R. 1625." Accessed July 3, 2020.
Joint Committee on Taxation. "Macroeconomic Analysis of the "Tax Cut and Jobs Act" as Ordered Reported by the Senate Committee on Finance on November 16, 2017," Download "JCX-61-17", Page 2. Accessed July 3, 2020.
Tax Foundation. "Preliminary Details and Analysis of the Tax Cuts and Jobs Act." Accessed July 3, 2020.
Congressional Budget Office. "Cost Estimate for the Conference Agreement on H.R. 1." Accessed July 3, 2020.
U.S. House of Representatives. "Hearing on the 2017 Tax Law and Who It Left Behind," Pages 8 and 50. Accessed July 3, 2020.
Politico. "Politico Analysis: At $2.3 Trillion Cost, Trump Tax Cuts Leave Big Gap." Accessed July 3, 2020
Committee for a Responsible Federal Budget. "Q&A: Everything You Should Know About the Debt Ceiling." Accessed April 15, 2020.
Tax Policy Center. "Did the Tax Cuts and Jobs Act Pay for Itself in 2018?" Accessed April 15, 2020.
The Library of Economics and Liberty. "Supply-Side Economics." Accessed July 3, 2020.
International Monetary Fund. "What Is Keynesian Economics?" Accessed July 3, 2020.
U.S. Department of the Treasury. "Office of Tax Analysis U.S. Department of the Treasury," Page 1. Accessed July 3, 2020.
U.S. Government Publishing Office. "Congressional Record: Proceedings and Debates of the 115th Congress, First Session, Senate," Page S7369. Accessed July 3, 2020.
The Brookings Institute. "What We Learned From Reagan’s Tax Cuts." Accessed July 3, 2020.
Tax Foundation. "2017 Tax Brackets." Accessed July 3, 2020.
World Bank Group. "Finding The Tipping Point -- When Sovereign Debt Turns Bad." Accessed April 15, 2020.
Federal Reserve Bank of St. Louis. "Federal Debt: Total Public Debt as Percent of Gross Domestic Product." Accessed July 3, 2020.
Center on Budget and Policy Priorities. "Tax Cuts for the Rich Aren’t an Economic Panacea — and Could Hurt Growth." Accessed July 3, 2020.
Tax Policy Center. "Do Tax Cuts Pay for Themselves?" Accessed July 3, 2020.