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The Trump Tax Cuts Led to Record-Low, Not High, Revenues Outside of a Recession

"Why You Shouldn’t Obsess About the National Debt"

Aug 28, 2024

Federal revenues lag far behind pre-tax cut budget projections.

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Current revenues are below pre-Trump tax cut projections

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Revenues today, however, are even lower than that analysis would indicate. In addition to revenue growth due to a strengthening economy, revenues as a percentage of GDP should also generally grow as the nation gets richer. Tax brackets grow with inflation, and the United States has a progressive tax structure where higher income is taxed at a higher rate; as wages over time grow faster than inflation, more income is taxed at a higher rate.

The only reason revenues as a percentage of GDP have hovered around their 50-year average, rather than continue to rise, is that Congress keeps enacting expensive tax cuts. Not only are revenues now much lower than they were in 2000; they’re dramatically lower than expected, given how much larger real GDP per capita is now than in 2000. The unemployment rate is roughly the same as it was in 2000, and average wages and salaries, after adjusting for inflation, are 22 percent higher.13

"The only reason revenues as a percentage of GDP have hovered
around their 50-year average, rather than continue to rise, is that
Congress keeps enacting expensive tax cuts."

But when measured as a percentage of GDP, revenues are 2.8 percentage points lower than they were in 2000. After adjusting for the size of the economy, the United States is collecting $809 billion less per year than it was in 2000, despite being richer and having similar employment.

Why are nominal revenues high if revenues as a percentage of GDP are low?

Looking only at nominal revenues yields an incomplete picture. Due simply to inflation, nominal revenues rise over time, even if the inflation-adjusted level of revenues falls. Nominal revenues also grow naturally as the population—and therefore the number of people paying taxes—increases, as well as due to real increases in economic activity per person. While it is true that nominal revenues are higher than they were prior to the passage of the Trump tax cuts, that is not a helpful analysis for assessing revenue trends. Nominal revenues are more than 100 times bigger than they were in 1944, but as a percentage of the economy, revenues are significantly lower.

Are revenues coming in above pre-Trump tax cut projections?

Some politicians have instead used a hybrid version that compares nominal revenues relative to pre-Trump tax cut CBO projections, with a focus on 2021 through 2023.14 While this approach avoids the pitfall, described above, of assuming that prices, population, and GDP growth would not change after 2017, it poses another set of problems.

First, revenue numbers during this period reflect temporary factors related to the pandemic. For example, pandemic legislation gave employers the option to defer payroll taxes on 2020 wages.15 Half of the deferred payroll taxes were due December 31, 2021, falling into federal fiscal year 2022 and the other half were due on December 31, 2022, falling into federal fiscal year 2023.16 This had the effect of shifting tax revenues from fiscal years 2020 and 2021 to 2022 and 2023, inflating revenue collections in those years. Pandemic legislation also created an incentive for businesses to shift income from 2020 to 2021 since it allowed them to immediately write off losses on their 2020 income but not their 2021 income.17 These are just some of the many factors—such as capital gains realizations surging from about 4 percent to 6 percent of GDP—that make the years immediately after the pandemic difficult to use for assessing the cost of the Trump tax cuts.18

"In 2023, nominal revenues were less than 2 percent above the CBO’s
pre-pandemic projections, but after adjusting for inflation,
they were 6 percent below these projections."

Second, the cost of the Trump tax cuts was always designed to fall significantly in the years leading up to 2025, which makes a focus on these years’ revenues misleading. The original JCT score projected that the cuts’ 2023 revenue loss would amount to $164 billion, compared with a 2019–2021 annual average cost of $254 billion.19 This is because over the period of 2022 through 2025, many Trump tax cut business provisions, such as bonus depreciation, were scheduled to begin expiring, while many tax increases on businesses kicked in, reducing the tax law’s cost over this period. This is, therefore, a misleading time period over which to assess the cuts’ permanent cost, especially since proponents of the Trump tax cuts support reversing those tax increases and tax provision expirations that reduced the law’s reduction to revenue.

Third, comparing nominal revenues with projections several years ago picks up macroeconomic factors unrelated to the Trump tax cuts. Since the enactment of the Trump tax cuts, the United States has experienced more inflation than was expected in June 2017, in large part due to supply chain disruptions resulting from the pandemic.20 Inflation pushes up nominal revenues—higher nominal wages and incomes bring more money into the system—but about 90 percent of those positive budget effects disappear due to higher nominal spending through items such as increases to Social Security’s cost-of-living adjustment.21 In other words, increases in revenues driven purely by inflation are meaningless.

In 2023, nominal revenues were less than 2 percent above the CBO’s pre-pandemic projections, but after adjusting for inflation, they were 6 percent below these projections. For this reason, focusing on revenues as a percentage of GDP—which allows the analysis to abstract away from often unrelated macroeconomic phenomena—is far more revealing. And as discussed earlier, revenues as a percentage of GDP lag far behind projections made prior to the enactment of the Trump tax cuts.

See also - Report
Tax Cuts Are Primarily Responsible for the Increasing Debt Ratio
Mar 27, 2023 Bobby Kogan
https://www.americanprogress.org/article/the-trump-tax-cuts-led-to-record-low-not-high-revenues-outside-of-a-recession/

Conclusion

The Trump tax cuts meaningfully reduced federal revenues. As a percentage of GDP, revenues are historically low given the high level of employment in the United States. And federal tax collections lag significantly behind projections made prior to the enactment of the Trump tax cuts.

With a significant portion of the Trump tax cuts set to expire at the end of next year, 2025 presents an opportunity for Congress to improve the tax code, both to make it fairer and to raise revenues to invest in American families and communities. As Congress considers the future of the Trump tax cuts, it should ensure the wealthy and corporations pay their share, especially by paring back some of the previously enacted corporate cuts.

https://www.americanprogress.org/article/the-trump-tax-cuts-led-to-record-low-not-high-revenues-outside-of-a-recession/