Federal budget expert: Blame Bush and Trump tax cuts for the US revenue problem
When jobs are plentiful and business profits soar, that means good news for federal tax revenues. At least, that’s how it’s supposed to work.
For 15 years after the Tax Reform Act of 1986 went into effect, that’s exactly what happened: Changes in the U.S. unemployment rate were a strong predictor of changes in our federal tax revenues as a percent of the GDP; a drop in the unemployment rate caused revenues as a percent of GDP to increase. But since the beginning of the 21st century, a series of tax cuts under presidents George W. Bush and Donald Trump have shattered the link between tax revenues and employment. Revenues as a percent of GDP dropped significantly, and now they no longer grow much when the economy strengthens.
After news that the federal deficit grew despite a strong economy, amid rising interest rates, there are renewed fears about the nation’s fiscal outlook. With these fears typically come calls to reduce spending. But the U.S. doesn’t have a spending problem; it has a revenue problem caused by tax cuts.
The Bush and Trump tax cuts broke our modern tax structure: Revenues are significantly lower and no longer grow much with the economy
Between 1995 and 2000, the unemployment rate fell from 5.6% to 4.0%, and revenues rose from 17.9% to 20.0% of GDP—the equivalent of taking in an additional $600 billion per year after adjusting for the size of the economy. When the unemployment rate fell a similar amount between 2015 and 2019, going from 5.4% to 3.7%, revenues dropped from 17.9% of GDP to 16.3%—the equivalent of taking in $450 billion less per year after adjusting for the size of the economy.
Why did this happen? Because during that same time, the Bush tax cuts, their bipartisan extensions, and later the Trump tax cuts slashed taxes, significantly lowering overall revenue. Importantly, a disproportionate share of the benefits from these cuts accrued to very rich Americans, profitable corporations and wealthy heirs.
This newfound pattern of low revenues even in times of high employment has persisted up to the present day. In fiscal year 2023—which just ended September 30—the unemployment rate averaged 3.6%, the lowest since 1969. However, because of these large tax cuts, revenues were a paltry 16.5% of GDP.
These lower revenues have a profound impact on the finances of the nation. Prior to the tax cuts being enacted, the Congressional Budget Office projected long-term stability of the debt-to-GDP ratio. Yes, the CBO projected rising spending driven by Medicare, Medicaid and Social Security. But the agency also projected that revenues would be able to keep up indefinitely without any additional tax increases, due to real wage gains leading to higher revenues. Now, however, the CBO projects that debt is on track to rise as a percent of GDP indefinitely, with revenues now significantly lower and no longer projected to match primary (noninterest) program costs.
Two points explain this. The first involves a concept called the fiscal gap, which measures how much primary deficit reduction is required to stabilize the debt-to-GDP ratio. The 30-year fiscal gap is smaller than the size of the Bush tax cuts, their extensions and the Trump tax cuts under current law over the next 30 years. Therefore, mathematically and unequivocally, without those tax cuts, the debt ratio would be declining, not rising.
Second, even though the debt ratio is rising, spending can’t be blamed. The CBO’s 2012 long-term budget outlook was the last time debt was projected to decline indefinitely—because that projection was made before the Bush tax cuts were largely permanently extended. And relative to the CBO’s 2012 projection, current projections of program costs are down, not up. In short, if you were trying to explain how we got from the CBO’s 2012 projection of a declining debt ratio to its current projections of a rising debt ratio, changes in spending have lowered the future debt path, but revenues have declined significantly more than spending. Changes in revenues are therefore entirely responsible for going from a declining debt ratio to an ever-growing debt ratio.
Both revenues and spending are lower than earlier projections, meaning low revenues are responsible for persistent primary deficits
The first step in effecting change is proper diagnosis. Those who look to blame spending to close the primary deficit are looking in the wrong place. If not for the regressive tax cuts initiated under presidents Bush and Trump, we would have been looking at a stable debt-to-GDP ratio. Any discussion of how to change our fiscal path should focus first on generating additional revenue lost to these tax cuts.
In 1946, at the end of WWII, our national debt was 119% of our nation’s GDP, much like today’s 123%. Truman and Eisenhower knew how to reduce that debt: high taxes on billionaires and massive expenditures on American infrastructure like schools, hospitals, highways, and airports to stimulate the economy. In just the seven short years leading to Ike’s inauguration they’d cut our debt down to 68% of GDP.
Jack Kennedy kept those high tax brackets for morbidly rich people: on every dollar over $400,000 a year ($4 million/year in today’s money), people paid 91 cents in income taxes. And, true to form, the economy was rip-roaring along, the middle class was growing faster than anywhere else in the world, and our debt was under control at 54% of GDP.
After Kennedy’s assassination, Lyndon Johnson gave a tax cut for the morbidly rich in exchange for their going along with his Great Society programs including Medicare and Medicaid: he cut the top rate to 70%, although he closed so many loopholes used by the rich that it actually increased federal revenues.
Republican President Richard Nixon was fine with the 70% top bracket on the morbidly rich, too, and kept it in place throughout his presidency. By the time he left the White House in 1974, our national debt was way down to 31% of GDP and it stayed there (32%) through the four years of Jimmy Carter’s presidency (1977-1981).
And then it happened. During Jimmy Carter’s presidency, five Republicans on the Supreme Court legalized — for the first time in the history of either America or any other developed country in the world — political bribery by billionaires and corporations alike.
It was a subset of Lewis Powell’s infamous Memo about how the very, very rich should rise up and seize control of American politics because they knew best how to run a country and, Powell suggested, all those pesky social programs from the New Deal and Great Society had put America on the road to communism.
Powell himself wrote the 1978 decision in First National Bank v Bellotti that legalized political bribery by giant corporations.
Reagan pursued Jude Wanniski’s Two Santas political strategy with gusto. Wanniski, in 1977, had argued that when Republicans held the White House they should use tax cuts and budget-busting spending to run up the national debt as fast and high as possible, thus injecting money and stimulus to let the good times roll.
This would make people think Republicans knew how to run an economy.
Republicans got so good at it that today the average billionaire in America pays around 3.2% in income taxes.
When Democrats came into office, Wanniski said, Republicans in Congress should begin to squeal loudly about the national debt (that Republicans had created with their tax cuts), claiming it was a threat to the nation. This, Wanniski said, would force Democrats to “shoot Santa”: vote to gut their own social programs.
Cue MAGA Mike Johnson.
The smarmy little man was so on-message yesterday that he even claimed that people in our military had told him they thought our national debt was a bigger threat to us than Russia or China. Nothing, Johnson argued, was more important than cutting back on the IRS’ ability to audit billionaires while reducing social program spending.
And now he’s collaborating with Republicans in the Senate to create a secret commission to slash Social Security behind closed doors.
So, get ready for the next 14 months (until the next Congress is sworn in January 2025) to be a nonstop attack on America’s poor, our middle class, and the entire spectrum of racial, gender, and religious minorities who make up the fabric of our nation. After all, somebody’s gotta pay for those massive tax cuts Reagan, Bush, and Trump gave Zuckerberg, Bezos, and Musk.
Medicare, Medicaid, Social Security, food stamps, housing subsidies, Obamacare, unemployment insurance, disability insurance, the Peace Corps, the GI Bill, federal home loan programs, the National School Lunch Act, Head Start, the Family and Medical Leave Act, dozens of supports for public schools: all these programs and more that benefit average Americans were passed by Democrats over the objection of the majority of Republicans.
The sad reality is that the GOP serves only two masters: giant corporate monopolies and the morbidly rich. They’ll toss a rhetorical bone to racists, misogynists, gun freaks, homophobes, and Nazis, but that’s just to get enough votes to hold political power: their real obsession, their true North Star, is great wealth.