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To simplify, tax revenue comes from multiplying a tax rate by the country’s income. The tax rate was cut in 2017. If income stayed the same, tax revenue would fall. But both of the main schools of thought in macroeconomics, the Keynesians and the Neoclassicals, believe that tax cuts will encourage economic growth and increase income (although for different reasons). The question now becomes this: Will income increase so much that tax revenues will increase even though the tax rate is lower? Note that since the tax cut we have seen a strong growth in employment, and very low unemployment rates. If the cut in the tax rate increases tax revenues, the deficit will shrink.
Before the results were in, the answer to this question was unknown. People tried to forecast what would happen. This video shows one point of view regarding predictions on the subject: U.S. Deficit to Surpass $1 Trillion Two Years Ahead of Estimates, CBO Says
As of February 2019, enough time has passed that we now have some actual evidence on what is starting to happen. The op-ed piece pasted below, “Tax Reform Covering Its Costs,” explains this evidence.
Here is the discussion question for you:
- • Do you think the Tax Cuts and Jobs Act will reduce our deficits? That is, will it increase tax revenue? Explain your answer.
AN article to read:
Tax Reform Is Covering Its Costs
Faster growth is on track to outpace debt in the next decade.
By Edward Conard
Feb. 4, 2019 7:02 p.m. ET
The Wall Street Journal
Is the 2017 tax reform paying for itself? It’s a complicated question, but the critics have made up their minds. Outlets like the Tax Policy Center claim the Tax Cuts and Jobs Act has diminished federal revenue rather than increase it as some supporters predicted. Other skeptics lament surging government deficits and debt. Some point to last year’s brief economic spurt as evidence of the law’s failure to drive long-term growth. Even if one accepts these arguments, none of them offers a conclusion about whether the tax cut was worth its cost.
Comparing expected growth in gross domestic product with growth in publicly held federal debt, before and after the tax cut, is a better way to answer that question. This comparison captures the long-term impact of tax reform on the economy and the federal budget.
Last week the Congressional Budget Office released a 10-year forecast—the first to assess the effects of tax reform after one year of hard results. Compared with its pre-reform projection, the CBO now expects annual GDP growth to be almost $750 billion higher by 2027, the last year of its prior forecast. A strong case can be made that tax reform played a predominant role in accelerating GDP growth. While most large economies stagnated last year, a sharp rise in business investment in the U.S. helped drive the economy forward.
On the other side of the ledger, the CBO predicts the tax cuts will add $1.9 trillion of additional debt in the coming decade, and that the government will pay about $60 billion more in interest each year as a result.
So the bottom line says an extra $60 billion a year buys the U.S. $750 billion in annual GDP. That’s a great deal for taxpayers.
Even focusing solely on tax revenue, the government is on pace to collect more than $120 billion each year from that additional $750 billion of GDP—much more than enough to cover the additional interest payments. Even if a significant portion of the projected GDP gains since 2017 are not the result of tax reform, the tax cut still pays for itself.
Tax reform increases real, inflation-adjusted GDP by $300 billion to $450 billion a year in the coming decade, relative to the CBO’s 2017 projection. Assuming a real growth rate of 1.8% and a real long-term U.S. government interest rate of about 1.2%, the value of that GDP boost dwarfs the amount of debt the government borrowed to finance the tax cuts.
Finally, don’t forget that the tax reform that passed was weakened by political compromises. To appease the bill’s critics—including many of those now questioning the law’s cost-effectiveness—lawmakers included a generous middle-class tax cut, padding the debt without accelerating growth. Imagine the value Americans could have gotten from a truly optimized tax cut.
Mr. Conard is an American Enterprise Institute visiting scholar, a former Bain Capital partner, and author of “The Upside of Inequality: How Good Intentions Undermine the Middle Class.”