How Much Trump's Tax Cuts Cost the Government
What Are the Costs of the Trump Tax Cuts to You?
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 projected the tax cuts and the budget would boost economic growth to 2.9% a year for the next 10 years. That prosperity would boost tax revenue enough to offset the tax cuts.
Two Other Reports Disagree
The 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.
The came up with a second conclusion. It said the Act will 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 billion in decreased revenue. But eliminating the mandate would add $700 billion in growth and savings. The plan would boost gross domestic product by 1.7% a year. It would create 339,000 jobs and add 1.5% to wages.
Who’s right? It all depends on what assumptions you use. 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.
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 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 sequestration. In 2011, some members even threatened to default on the debt rather than add to it. Now they say that the 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.
Tax cuts work when the economy is sluggish, businesses need money, and tax rates are high. For example, the 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.
, many large corporations said they don’t need the money from the tax cuts. They are sitting on a record , 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 , 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
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.
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. Let your and know your thoughts about the Trump tax cuts.