Oct 02, 2017

Correcting the Record: The Truth About Tax Reform & Debt

Post by Freedom Partners

Leaders in Congress and the Administration recently released more details of their framework for tax reform that will help unrig the economy and make America competitive again for jobs and investment. While history proves tax reform means more jobs, higher wages, bigger paychecks and greater financial security for Americans to save and plan for the future, critics of the tax plan claim it will add to the national debt and will fail to yield significant economic growth.

“President Trump and his congressional allies are about to make the trajectory of debt even worse,” according to a Wall Street Journal column entitled “The Tenuous Logic Behind Republicans’ About-Face on Debt.” “Debt rose as a share of gross domestic product after Ronald Reagan and George W. Bush cut taxes; it fell after Bill Clinton raised them.”

The truth? The U.S. is plagued with deficits and debt – but it’s not because of cutting taxes. The ratio of debt to Gross Domestic Product (GDP) tells you that debt increased relative to the growth of the economy, but it doesn’t tell you why. If you want to know whether the tax cuts added to deficits, don’t look at debt to GDP, just look at the revenue. Then, look at the spending.

Here’s what you’d find:

When President Reagan first began cutting taxes in 1981, revenues did dip initially. However, much of that can be attributed to the economic downturn that took place as a result of tighter monetary policy to fight inflation. By 1984, revenues had turned around and began increasing by billions of dollars each year. 5 years after the cuts were fully phased in, the federal government was collecting more than $300 billion in additional revenue each year. The debt and deficit growth during this time period was not due to a lack of funds—rather due to out of control spending. In fact, from 1981-1985 federal spending was 22.1 percent of GDP—well above the post-WWII average of 19.3 percent. Keep in mind that economic growth during this time period averaged 3.4 percent annually, so this heightened level was not the result of a sustained economic slowdown.

In the five years following tax cuts signed into law by presidents Kennedy, Reagan and Bush, the economy surged, federal revenue grew by hundreds of billions of dollars, millions of jobs were created and Americans took home thousands of dollars more in wages each year. Unfortunately, when it comes to federal tax cuts, the government has a spending problem—not a revenue problem. And while tax cuts may lead to a short-term reduction in revenues, the resulting economic growth has consistently led to more revenue in the long-term.

Spending is the true driver of deficits and the national debt, and to suggest otherwise is a great mischaracterization. In order to ensure lasting effects from tax reforms and cuts, efforts to enact a simple, fairer and flatter tax code along with rate relief Americans deserve should be paired with spending restraints, as well as continued regulatory relief. We do not claim that tax relief is a silver bullet, but it is a crucial piece of the puzzle that has been neglected for more than 30 years.

Increase in Federal Tax Receipts During the Years Following Kennedy, Reagan & Bush Tax Cuts

Critics also say economic growth under the Trump plan won’t live up to its billing.

“Mr. Trump says he’ll boost long-term economic growth by at least a full percentage point. House Republicans say their budget plan (which must later be reconciled with the Senate’s) will raise growth 0.7 percentage point, yielding $1.8 trillion of deficit reduction over a decade,” the Wall Street Journal article said. “There is little evidence from the last few decades that a tax rate cut raised underlying growth in the U.S. or any other advanced economy anywhere near that amount, once the vicissitudes of the business cycle are factored out.”

Actually, there’s nothing but evidence that shows tax cuts raised underlying growth.

In the five years following Kennedy, Reagan and Bush tax cuts, average annual Gross Domestic Product (GDP) grew significantly at 5.2 percent, 5 percent and 3 percent, respectively, according to Bureau of Economic Analysis data. In fact, the U.S. economy grew from near-recessionary levels following the enactment of the Reagan tax cuts.

GDP Growth in the Years Following Kennedy, Reagan & Bush Tax Cuts

Through tax and regulatory reform, the Trump administration has said it hopes to achieve 3 percent growth. Given the administration’s claim that it has “withdrawn or removed from active status” 860 regulations this year – a pace of eliminating 16 old rules for every new one – this goal amounts to a feasible outcome under the highly completive 20 percent corporate rate proposed by “Big Six” tax negotiators.

No one is saying tax reform shouldn’t also be paired with other good government reforms. A Washington that lives within its means, spends taxpayer dollars wisely and reduces federal overreach will help both grow the economy and secure our nation’s long-term fiscal future.

But the evidence is clear that rate relief has consistently led to more jobs and higher wages for the American people. Making it a reality would let taxpayers keep more of their hard-earned money, increase America’s global competitiveness, and send a message that there will be no better place in the world to invest and create jobs than the United States.