In that spirit, let’s start with the 2017 tax cut, the singular legislative achievement for President Trump and Republicans in Congress. Skeptics of the deal believed that, contrary to claims that it would “pay for itself” and lift the middle class, it would rob the treasury of much-needed revenue and, by tilting its gains toward the already rich, exacerbate our economy’s already high levels of inequality. That would make it Exhibit A in the case against Trump’s faux populism.
The evidence is in, and the skeptics were right: Revenue is way down, and, according to a new analysis by the Congressional Budget Office, after-tax inequality is heading up.
In the most recent fiscal year, federal tax revenue as a share of gross domestic product came in at 16.3 percent. That’s not just below the historical average of 17.4 percent. It’s also below the 18.4 percent level that has prevailed in periods like the present, with the economy operating near full capacity. In today’s economy, that’s $450 billion in missing revenue.
Here’s another way of revealing the revenue-draining impact of the tax cuts. The top line in the figure shows the CBO’s estimates of expected revenue (as a share of GDP), given the tax system in place before enactment of the 2017 law. It expected the share to drift up from the mid-17s to above 18 percent. The bottom line is the actual revenue shares for 2018-2019 and its latest forecast for 2020-2021. As you see, it’s well below the pre-tax-cut prediction.
For most people, this is a big “duh.” You cut taxes, and revenue falls. But since the Reagan years, Republican tax cutters have pledged fealty, against the facts, to an idea called the Laffer curve, named for the economist Art Laffer.
This model implies a nonlinear relationship between tax rates and revenue. On the left side of the curve, revenue rises with rates. On the right side of the curve, revenue allegedly falls with higher rates. The history of tax changes shows this to be wrong, which is why most public finance economists have long dismissed the model.
But in case anyone still believes the Laffer curve, the revenue outcome from the 2017 tax cuts means that even under Laffer’s model, tax rates need to rise. That is, those who argued that the tax cut would raise revenue were arguing that our federal tax system was at Point A on the Laffer curve, where lower taxes generate more revenue. But the actual outcome suggests we were at Point B, where lower taxes generate less revenue.
The model is bunk, of course, as I suspect even its proponents recognize. I suspect they view less government revenue as a feature, not a bug, even though the idea that collecting less revenue will somehow rein in spending has been shown to be false, as we see in our rising budget deficits. But the point remains: Based on the concept used to justify the tax cuts, they’ve failed.
The next figure comes from a new CBO study that projects incomes before and after taxes and government transfers (the income value of the various safety-net programs) for different income groups between 2016 and 2021. The study captures interesting dynamics about the ways tax cuts and transfer programs work in strong economies.
Because many anti-poverty programs are “means-tested” — eligibility is a function of income — receipts of those benefits go down when the economy goes up. Tax cuts, however, have the opposite effect. As incomes rise, they just keep giving. Thus, with unemployment at a 50-year low, we would expect a tax cut tilted toward the wealthy to raise incomes at the top, and at the same time, transfer programs deliver less to the bottom. In other words, a recipe for higher inequality.
That’s exactly what the CBO finds. The figure shows its projected change in the shares of income for different income groups, after taxes and transfers. CBO predicts that between 2016 and 2021, the share of income going to the bottom and middle fifths will fall slightly, while that going to the top fifth grows by 1.2 percentage points, with the majority of that gain (0.9) coming from the top 1 percent. (Data note: Because CBO values Medicaid at market prices for health care, which are extremely high in the U.S. context, the income of the poor is overstated in its analysis. However, this effect is small when tracking changes over short periods, as is the case here.)
So not only did the tax cut break the linkage between economic growth and revenue flows, but it also significantly damaged the inequality-reducing function of our tax and transfer system.
Other attacks on the safety net by the Trump administration, including cuts to SNAP (nutritional support) and Medicaid eligibility, only serve to exacerbate that problem. The inescapable motivation of these policies is to use the tax and transfer systems to redistribute income from the bottom of the income scale to the top.
So, the next time you hear Trump or any other conservatives whine about the creeping socialism of the left, be aware the right is already deeply engaged in their own socialist project. It’s socialism for the rich. And the evidence shows that it’s working exactly as they planned it.