I recently testified for the Senate Budget Committee on the topic of taxes, economic growth, and budget deficits.
First, the 2017 Tax Cuts and Jobs Act was a success. Second, tax cuts did not cause the federal deficit. And third, the topic of this hearing is really about the appropriate size and scope of government—a topic on which reasonable people can disagree. However, if Congress decides that the current trajectory of federal spending does not need to be curtailed, it should be honest with the American people. Big government is expensive, and it will require significantly higher taxes on everyone.
I’ll begin with a bit of history of the 2017 tax cuts. After years of misleading reporting, many Americans still don’t believe that they benefited from a tax cut. This is a shame because the law not only lowered taxes for Americans at every income level, it simplified taxpaying, and supported an economy that was struggling to finish the long climb out of the great recession.
The law cut taxes for more than 80 percent of Americans and cut the tax bill for the lowest‐income Americans the most. Despite claims to the contrary, the Tax Cuts and Jobs Act made the U.S. tax code more progressive—collecting a larger share of tax revenue from the highest‐earning taxpayers.
The law cut tax rates for individuals, doubled the child tax credit, and curtailed special interest itemized deductions so that 30 million more taxpayers now used the simpler and larger standard deduction.
The tax cuts also boosted wages, investment, and economic growth by expanding full expensing for businesses and lowering the corporate tax rate to 21 percent—moving us from one of the highest rates in the developed world to a bit above average. In 2018, investment outpaced CBO projections, new manufacturer orders increased, and small business optimism peaked.
The labor market also improved. Wage growth went from flat or declining, to steadily increasing. At the beginning of 2020, the average production and nonsupervisory worker saw about $1,400 in higher wages. These economic gains were also widely shared. Following the tax cuts, inequality declined as income growth among lower‐income and minority households outpaced all others.
Second, the deficit is the result of unsustainable spending growth, not a lack of tax revenue.
Last year, federal revenue was at a two‐decade high, and this year’s revenue as a share of the economy will be a full percentage point above the historical average. If the Treasury collected as much revenue as it did when we had a budget surplus in 2000, the current deficit would still be above five percent of GDP.
It’s new spending that drives the deficit. For example, President Biden has added about $5 trillion in unnecessary spending to the national debt. That’s more than three times the 10‐year revenue reduction of the 2017 tax cuts.
Deficits are caused by spending more than Congress is willing to raise in taxes.
Which brings me to my final point. Americans benefit from being a relatively low‐tax country, compared to many others around the world.
A lower‐income taxpayer will pay about $6,000 more in taxes if they move to Europe. A middle‐class taxpayer would fork over more than half of his income and pay about $16,000 more in taxes.
President Biden’s pledge to increase government spending without raising taxes on Americans earning less than $400,000 is a mathematical fiction. Every other large modern welfare state funds its programs with high taxes on the poor and middle class. Advocates of more government spending need to be honest with the American people. Big government requires significantly higher taxes on everyone, not just the rich.
Tax increases are also no panacea. Historically, higher taxes prolong and deepen recessions, fuel higher spending, and don’t lower government debt ratios. Keeping government small is the best way to ensure the American people can continue to prosper.
Without addressing spending growth, ever‐larger tax increases mean the poor will get poorer, and deficits will get bigger.
Instead, I hope that Congress addresses the drivers of our unsustainable budget, puts constraints on the size and scope of government, and protects Americans from the costs of higher taxes as the 2017 tax cuts begin to expire.