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There are various economic models used to estimate how changes in tax policy will affect economic growth and budget deficits. They contain lots of variables and lots of assumptions. (Of course, don’t mistake the map for the territory and all that.)
But it’s pretty tough to find a legit model that suggests tax cuts pay for themselves. That usually doesn’t happen. The Reagan tax cuts didn’t pay for themselves. The Bush tax cuts didn’t pay for themselves. And the Trump tax cuts almost surely won’t pay for themselves. In other words, they are overall revenue reducing even if they boost economic growth somewhat. Doesn’t necessarily mean tax cuts are bad, just that they need to be judged in the broader fiscal context. The Reagan tax cuts, for instance, took place when the debt-GDP ratio was 25%. Now it’s three times that.
We can argue, of course, over the best way to model the impact of a tax cut. But this, from a column by economist Thomas Sowell, is about the worst way of judging a tax cut:
The hardest of these hard facts is that the revenues collected from federal income taxes during every year of the Reagan administration were higher than the revenues collected from federal income taxes during any year of any previous administration. How can that be? Because tax RATES and tax REVENUES are two different things. Tax rates and tax revenues can move in either the same direction or in opposite directions, depending on how the economy responds. But why should you take my word for it that federal income tax revenues were higher than before during the Reagan administration? Check it out. . . .
Each annual “Economic Report of the President” has the history of federal revenues and expenditures, going back for decades. And that is just one of the places where you can get this data. The truth is readily available, if you want it. But, if you are satisfied with political rhetoric, so be it. . . . That should have put an end to the talk about how lower tax rates reduce government revenues and therefore tax cuts need to be “paid for” or else there will be rising deficits. There were in fact rising deficits in the 1980s, but that was due to spending that outran even the rising tax revenues.
That column, by the way, is from last May but is making its away again around the internet.
Anyway, here’s the thing: Generally when an economy grows, revenue goes up. Usually, revenue only falls during recessions. Revenue even rises despite supposedly economy-killing tax hikes. So pointing out increasing revenue is sort of beside the point. It doesn’t tell us whether the tax cut generated enough growth to offset the decline in tax rates. (It probably didn’t.)
Oh, and one more thing about the Reagan tax cuts since they continue to influence GOP economic thinking:
For starters, the Reagan tax cuts didn’t pay for themselves, despite what Paul subtly suggests. Income tax revenue fell from 9 percent of GDP in 1981 to 8 percent in 1989. A 2006 Bush administration study found Reagan’s 1981 tax cuts lost an average of $200 billion a year, in today’s dollars, over their first four years. A 2004 study by two Bush economists estimated that in the long run, “about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent.” . . . What’s more, the Reagan tax cuts didn’t spur some crazy period of light-speed growth. From 1981 through 1990 — a period including both the 1981 and 1986 tax cuts and ending just before the Bush I tax hikes — real GDP grew by 3.3 percent a year, versus 3.2 percent during the previous decade. Indeed, the Reagan boom occurred in the middle of the “great stagnation” in U.S. productivity that has lasted from the early 1970s until today (other than a period from the mid-1990s through mid-2000s).