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 (TCJA) would add $1.8 trillion in new revenue. That would more than pay for the $1.5 trillion cost of the tax cuts themselves, according to an analysis by the U.S. Department of Treasury.
The analysis looked at the combined effect of the tax cuts and Trump's Fiscal Year 2018 budget. The budget planned to 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.
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 (JCT) 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 0.8% 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 the TCJA's elimination of 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. Congress could make the individual cuts permanent when the time comes. If that happened, 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.
In 2011, Republicans supported the Budget Control Act, which automatically cuts spending across the board between 2013 and 2021. These mandatory spending cuts were called sequestration.
In 2013, Republicans threatened to not raise the debt ceiling to force budget cuts. That would have forced the U.S. to default on its debt. Fortunately, better-than-expected revenue meant the debt ceiling debate was postponed until the fall.
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 didn’t need the money from the tax cuts. They were 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 would 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.
Tax cuts helped end a recession during the Reagan administration because the highest tax rate at that time was 70%. Lower interest rates and increased government spending also boosted growth.
The 2017 tax rates were 30 percentage points lower than they were before the Reagan tax cuts. As a result, they could hurt economic growth by increasing 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 0.017 percentage point in growth.
The U.S. public debt-to-GDP ratio was 104% before the tax cuts. By 2019, it had risen to 107%. That doesn't count intragovernmental debt that's owed to Social Security and other federal agencies.
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 50% to 65%.
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 that included the impact of the FY 2018 budget.
- The JCT said the TCJA would increase the deficit by $1 trillion, but that 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 Nov. 27, 2020.
The White House. "America First: A Budget to Make America Great Again," Page 51. Accessed Nov. 27, 2020.
The White House. "Remarks by President Trump at Signing of H.R. 1625." Accessed Nov. 27, 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 Nov. 27, 2020.
Tax Foundation. "Preliminary Details and Analysis of the Tax Cuts and Jobs Act." Accessed Nov. 27, 2020.
Congressional Budget Office. "Cost Estimate for the Conference Agreement on H.R. 1." Accessed Nov. 27, 2020.
U.S. House of Representatives. "Hearing on the 2017 Tax Law and Who It Left Behind," Pages 8 and 50. Accessed Nov. 27, 2020.
Politico. "Politico Analysis: At $2.3 Trillion Cost, Trump Tax Cuts Leave Big Gap." Accessed Nov. 27, 2020
Center on Budget and Policy Priorities. "How the Across-the-Board Cuts in the Budget Control Act Will Work." Accessed Nov. 27, 2020.
Committee for a Responsible Federal Budget. "Q&A: Everything You Should Know About the Debt Ceiling." Accessed Nov. 27, 2020.
Congressional Research Service. "The Debt Limit Since 2011," Page 11. Accessed Nov. 27, 2020.
The Library of Economics and Liberty. "Supply-Side Economics." Accessed Nov. 27, 2020.
International Monetary Fund. "What Is Keynesian Economics?" Accessed Nov. 27, 2020.
U.S. Department of the Treasury. "A Dynamic Analysis of Permanent Extension of the President’s Tax Relief," Page 1. Accessed Nov. 27, 2020.
U.S. Government Publishing Office. "Congressional Record: Proceedings and Debates of the 115th Congress, First Session, Senate," Page S7369. Accessed Nov. 27, 2020.
The Brookings Institute. "What We Learned From Reagan’s Tax Cuts." Accessed Nov. 27, 2020.
Tax Policy Center. "Highest Historical Marginal Income Tax Rates." Accessed Nov. 27, 2020.
World Bank Group. "Finding The Tipping Point -- When Sovereign Debt Turns Bad." Accessed Nov. 27, 2020.
Federal Reserve Bank of St. Louis. "Federal Debt: Total Public Debt as Percent of Gross Domestic Product." Accessed Nov. 27, 2020.
Center on Budget and Policy Priorities. "Tax Cuts for the Rich Aren’t an Economic Panacea — and Could Hurt Growth." Accessed Nov. 27, 2020.
Tax Policy Center. "Do Tax Cuts Pay for Themselves?" Accessed Nov. 27, 2020.