National Economic Council Director Larry Kudlow: “Well, actually, overall revenues are up about 10 percent. So that’s a pretty good number. And let me say, one of the people that are skeptical of us, the Congressional Budget Office, nonetheless, their estimates before taxes and most recently after the taxes, they have argued, they have said, there’s roughly $7 trillion of higher nominal GDP, and from that comes about 1.2 trillion in extra revenues, so that the tax cuts are about 80 percent paid for overall.”
— Exchange on PBS’s “NewsHour,” March 11, 2019
“Even the CBO, with which we generally disagree — I’m not breaking news here on my part — but they just published their new numbers. You know, from the point of pre-tax-cut to now, we have had about $7 trillion unexpected increase, $7 trillion over 10 years in terms of GDP. And that kind of calculates to roughly 1.2, 1.3 trillion in additional revenue. That’s the CBO numbers. These are all 10-year estimates. I apologize for that, but that’s the convention. So, what am I saying here? The tax cut was about 1.5 trillion scored. We have virtually paid for it — I guess 80 percent paid for it — and that’s by the CBO’s own numbers.”
— Kudlow, in an interview on CNBC’s “Squawk on the Street,” March 8, 2019
President Trump’s chief economic adviser says new numbers from the Congressional Budget Office show that 80 percent of the administration’s tax cuts will be paid for in a decade. Even when accounting for lost revenue, the tax cuts will “virtually” pay for themselves because of increased economic activity, Kudlow suggests.
He’s not the first Republican to claim tax cuts pay for themselves. But he is the first to twist what the CBO’s nonpartisan number-crunchers said in a Feb. 28 analysis.
CBO Director Keith Hall factored in several big developments in this analysis. One was the estimated effect of the tax cuts Trump signed in December 2017. Another was “changes to federal spending resulting from legislation enacted early in 2018.” The biggest change came from “revised historical data and changes in the economic outlook ... before accounting for the effects of the tax act.”
The CBO breaks down the effect of the tax cuts by themselves — but Kudlow isn’t using that specific, smaller number. He’s citing the much larger estimate that folds in all the changes.
The Tax Cuts and Jobs Act lowered rates for individuals and businesses. The CBO in 2018 estimated that in the 10 years between 2018 and 2027, the bill would reduce revenue by $1.65 trillion and boost the deficit by almost $1.5 trillion, before accounting for the cost of additional deficit borrowing. The CBO also estimated that the tax cuts would spur net economic growth at the same time that they drove up the federal debt.
On Feb. 28, Hall gave an updated economic forecast. Kudlow accurately noted that CBO analysts revised upward by $7 trillion their estimate for nominal GDP for the 10-year period from 2017 to 2027.
But Kudlow went on to say that the added tax revenue from that $7 trillion — roughly $1.2 trillion to $1.3 trillion, he said — would cover 80 percent of the cost of Trump’s tax cuts.
On CNBC, he attributed this to “the CBO’s own numbers.” On PBS, anchor Judy Woodruff mentioned experts who have challenged the administration’s economic projections. Kudlow, offering the CBO analysis as a defense, said “there’s roughly $7 trillion of higher nominal GDP, and from that comes about 1.2 trillion in extra revenues, so that the tax cuts are about 80 percent paid for overall.”
That’s a bunch of spin.
Hall broke down the added $7.17 trillion in nominal GDP into several different buckets:
- Close to 38 percent, or $2.7 trillion, “consists of the effects of revised historical data and changes in the economic outlook after January 2017 and before accounting for the effects of the tax act.” (Emphasis ours. Hall is saying specifically that these changes were not tied to the tax cuts.)
- Nearly 32 percent, or $2.33 trillion, “is the effect of the 2017 tax act on CBO’s projection of GDP.” This is where Hall isolates the estimated economic gains from Trump’s tax cuts.
- Around 18 percent, or $1.29 trillion, stems from “other policy changes ... especially the changes to federal spending resulting from legislation enacted early in 2018.” No tax-cut talk here.
- The remaining 12 percent, or $846 billion, represents “revisions to the economic outlook and changes to data.” This is not tied to the tax cuts, either.
When Kudlow mentions the added $7 trillion in GDP covering 80 percent of the tax cuts’ cost, and cites the CBO analysis, he misses the point and ends up in deceptive territory. The question is really whether the tax cuts generate more revenue than they remove from the equation. If you have economic growth from other sources and you’re using it to cover the cost of the tax cut, you’re forgoing other uses for that money.
The CBO is estimating that $2.33 trillion, or one-third of the extra $7 trillion, will come from economic activity sparked by Trump’s tax cuts.
The budget analysts don’t make the claim that this economic activity would cover 80 percent of the cost of the tax cuts. Hall wrote that “macroeconomic feedback from the tax act offset about 30 percent of CBO’s estimate of the act’s increase in budget deficits through 2028 — or 20 percent after debt-service costs are accounted for.” (The tax cut increases the deficit, which means the government would be borrowing more money to cover some expenses over the 10-year period.)
So, you take the increased economic activity (deficit-reducer), the interest on the borrowed funds (deficit-raiser) and the lost revenue (deficit-raiser). Then you do the math. Looking solely at the tax cut, the CBO says the increased economic activity offsets 20 percent of the growth in the deficit over 10 years. Overall, the tax cut would increase the projected deficit by more than $1.8 trillion through 2028, the CBO said. (Note that this is a slightly different 10-year budget window than the original estimate.)
“Kudlow seems to be counting the entire difference in GDP between two CBO projections as being caused by the TCJA,” said Kyle Pomerleau, chief economist and vice president of economic analysis at the Tax Foundation. “While it is completely possible CBO is off in its projection and the tax cut is contributing to more (or less) than estimated, Kudlow is still misstating what CBO is projecting here.”
“There were a bunch of reasons that CBO revised their forecast up — revised economic data, policy changes — in addition to the Tax Cuts and Jobs Act, and the TCJA itself,” said Benjamin R. Page, senior fellow at the Urban-Brookings Tax Policy Center.
Kudlow was making this claim that the tax cuts were “virtually paid for” even before the CBO revised its GDP forecast in February. It hasn’t aged well. (Here’s an August 2018 article from FactCheck.org.)
The White House did not respond to our requests for comment.
The Pinocchio Test
Kudlow’s comments are misleading because he’s twisting what the CBO analysis says. He’s doing it repeatedly and in front of TV cameras. He has made these claims before and after the updated forecast from the nonpartisan budget office.
The CBO’s analysis says increased economic activity from Trump’s tax cuts would offset 20 percent of the growth they’re adding to the deficit over 10 years. That’s a big net negative. It’s a far cry from saying economic growth would cover 80 percent of their cost. And it’s the kind of spin worth Four Pinocchios, especially when Kudlow misstates the sober analysis of the CBO for political purposes.
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