Putting the ‘Trump tax cuts will pay for themselves’ myth to bed

Recent estimates from the Treasury Department show that revenue dropped by 0.4 percent in calendar year 2018, a rare occurrence in American history — particularly when the economy is this strong. That’s bad news for our budget deficits, which are likely to reach $900 billion this year. 

A 0.4-percent reduction might not seem like much, but it’s huge when put into context. Inflation grew by about 2 percent, and the economy grew (nominally) by more than 5 percent.

{mosads}Revenue should have grown by 7 percent this year. Instead, revenues fell. They fell despite strong economic growth, moderate inflation and unemployment at its lowest level in nearly 50 years. 

The reason? At the end of 2017, when deficits were already rising and the baby boomers were continuing to retire, Congress and the president enacted a massive new tax cut.

According to official projections, that tax cut increased future deficits by almost $2 trillion over a decade. And with one full year of the new tax code behind us, we now have good evidence to back up these projections. We can put to bed the myth that the tax cuts are paying for themselves.

The theory, at least, was that the tax cuts would massively accelerate economic growth. In reality, the tax bill’s deficits were an irresponsible economic experiment that poured stimulus into an already strong economy. 

The cuts did offer a little bit of juice for this year’s growth rate and may strengthen the economy modestly for a few years. But ultimately, the additional debt they create will slow future growth rates and leave our debt on an even more unsustainable path. 

Even before the tax bill, the country was raising too little revenue to finance the retirement of the baby boom generation. Social Security and federal health-care spending alone will grow by 2.4 percent of GDP over the next decade.

Certainly there are smart ways to slow that growth — for example, by reducing health care costs or slowing Social Security benefit growth for high earners — but any reasonable plan to save those programs would also involve more revenue.

Instead of using tax reform as an opportunity to raise this revenue, however, we used it as an excuse to cut taxes. And then we followed the tax cuts with a large increase in defense and non-defense discretionary spending.

As a result, the need for more revenue is more acute now than ever. Outside the Great Recession or 2003 tax cuts, revenue as a share of GDP is lower than any time since 1965.

The economy is in its ninth year of recovery from the Great Recession; it is time to realize that we are likely closer to the next recession than the last one.

With the unemployment rate low and the economy booming, now is a good time to replenish that rainy day fund. We must make sure the country is well-positioned to handle the next recession, disaster or international crisis.

In the midst of a crisis, we don’t want to find ourselves unable to borrow as cheaply, whether it’s because of the withdrawal of foreign creditors, higher interest rates or wariness about raising the debt to record heights. 

The House recently reinstated pay-as-you-go rules that require any new tax cuts (or spending) to be paid for. This is an important first step, as abiding by these rules will help prevent our current course from getting worse.  

But even on our current course, debt will exceed its World War II record in the early 2030s; and that assumes no major war or deep recession.

We need more tax revenue. Without it, our debt is likely to continue growing unsustainably.

{mossecondads}Encouragingly, new ideas are entering the political discussion. Those in Congress and on the campaign trail are talking about rolling back some of the 2017 tax cuts, raising tax rates, closing loopholes and expanding the Social Security payroll tax.

There is also talk of new taxes on carbon, wealth, financial services and even miles driven. And of course, the country still has more than $1.6 trillion of annual tax expenditures that could be cut or reformed.

We don’t need to raise all those taxes, but they should all be on the table. It won’t be easy to find the right mix of tax and spending policies that can manage to both fix the budget and get enacted into law under our political system.

We cannot allow our deficits to grow indefinitely. The fact that revenue has fallen while spending is rising means we are currently doing just that. It’s time to reverse this trend and make sure the country is raising enough revenue to pay for the government it wants. If we don’t, our grandchildren will.

Tyler Evilsizer is the deputy policy director at the nonpartisan Committee for a Responsible Federal Budget.