“We’re actually taking in more revenue now than we did when we had the higher taxes because the economy’s doing so well.”

— President Trump, in an interview with Rush Limbaugh, Jan. 6, 2020

The way the federal budget works is often a mystery to Americans. But it shouldn’t be to the president of the United States.

Here, the president makes a basic mistake. He asserts that even though he signed into law a bill cutting taxes in 2017, revenue has kept going up — a fact he attributes to a robust economy. Some listeners might even have gotten the impression that the tax cuts were paying for themselves — a false claim the administration made repeatedly before the passage of the tax bill.

But revenue was always supposed to be going up year after year, despite the tax cuts. And revenue is way down from what had been anticipated before Congress approved the tax cuts, which (along with higher spending) is the reason the federal budget deficit is soaring despite a good economy.

The Facts

When politicians speak of tax cuts or spending cuts, they are referring to numbers measured against a “baseline” — specifically the “current services” baseline. This is designed to measure the impact of policy changes in government spending and taxes versus current policies. The baseline records what would happen if nothing is changed and current policies remained the same.

But that’s not the same as simply believing that the dollars spent or raised remained the same. Inflation and population growth over time raise the cost of programs, while even a slowly growing economy will result in more taxes being collected. If you earned the same salary year after year, eventually you would feel pinched as costs for groceries and housing rise.

Politicians often try to sugarcoat spending reductions by claiming they are merely “slowing the growth.” They might point to the fact that raw dollars devoted to the program would go up year after year. (Trump, in fact, made such a claim when he was under attack for proposing a big reduction in Medicaid spending.)

Well, a tax cut is generally little more than “slowing the growth” in revenue. The Trump tax bill was estimated in 2017 to reduce taxes by $280 billion in 2019 and $259 billion in 2020. Those sound like big numbers, but even so, the tax revenue collected was also anticipated to keep going up, year after year. (Compared with other recent tax cuts, the Trump tax was not especially large when measured against the size of the U.S. economy, though the president frequently falsely claims it was the biggest in U.S. history.)

When the Congressional Budget Office produced its baseline budget projections a few months after the passage of the tax bill, it showed federal revenue would keep increasing, even after those tax cuts:

  • 2017: $3.316 trillion
  • 2018: $3.339 trillion
  • 2019: $3.49 trillion
  • 2020: $3.678 trillion

Those numbers have stayed relatively consistent. Most recently, in August, CBO estimated $3.451 trillion in revenue for 2019 and $3.62 trillion for 2020, indicating a slight decrease in expected revenue compared to immediately after the tax cut was approved.

Raw numbers don’t tell the whole story, of course. When comparing budget numbers over time, it’s generally more useful to look at revenue as a percentage of the gross domestic product (GDP), the broadest measure of the U.S. economy. As a percent of GDP, revenue was expected to drop from 17.2 percent in 2017 to 16.3 percent in 2019 and 16.4 percent in 2020, the CBO said.

That’s a key reason the federal deficit is soaring — from $665 billion in 2017 to more than $1 trillion in 2020. That’s not supposed to happen when the unemployment rate is below 4 percent. Recall that in Bill Clinton’s presidency — he raised taxes and Congress cut spending — that the budget actually went into surplus. But Trump has signed bills that cut taxes and also dramatically increased spending — the exact opposite approach.

“Trump’s statement is wildly misleading because the economy almost always grows from year to year in nominal terms, except during deep recessions,” said Richard Kogan, a former White House budget official and staff member of the House Budget Committee who is now senior fellow at the Center for Budget and Policy Priorities. “Therefore, nominal revenues almost always rise from year to year.”

Kogan noted that a tax cut that had boosted the economy might also show smaller revenue as a percentage of GDP, so he suggested testing Trump’s statement by looking at revenue levels and growth rates after adjusting for population growth and inflation.

At our request, he dug into the numbers and compared two eight-year time periods: fiscal 2009-2017, and fiscal 2017-2025, using projections for future years from CBO’s August baseline. The first period encompasses the recovery that began after the June 2009 end of the Great Recession to the last year before the tax cuts took effect; the second period is from the year after the tax cuts were approved though the final year before the individual tax cuts in the law are scheduled to expire.

“The results seem convincing to me: During the first period, revenues rose at an average annual rate of 3.5 percent (after adjusting for population and price growth),” Kogan said. “During the second period, in which the 2017 tax cut took effect, post tax cut, revenues are projected to rise at an average annual rate of 1.4 percent.” (Note: Some tax cuts expired in the first period, but that would seem to underscore that tax increases cause higher revenue growth while tax cuts produce less growth.)

Looking just at economic growth rates, again adjusting for population and price growth, Kogan said the economy grew by an average annual rate of 1.4 percent from 2009 through 2017 and is projected to grow at an annual average rate of 1.3 percent from 2017 through 2025. “The implied claim that economic growth has been extraordinary, because of the tax cut or for other reasons, is wrong,” Kogan concluded.

The White House did not respond to a request for comment.

The Pinocchio Test

Tax revenue has increased each year since the tax cut was passed. But there’s no surprise about that. Revenue was estimated to keep going up, because the tax cut merely slowed the growth of revenue, it did not reduce it.

Trump gets virtually everything wrong in his framing of this factoid: Revenue has not increased because of the tax cut or because of the economy. If anything, revenue estimates have slightly declined for 2019 and 2020 since the passage of the tax cut. And revenue growth is sharply down in the period after the tax cut, compared with the period before it.

The president needs a remedial lesson in budget policy. In the meantime, he earns Four Pinocchios.

Four Pinocchios

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