The Coming Tax Fight Will Not Be What You’re Expecting

One of the most consequential policy fights of the coming year will be over taxes. Most parts of the Tax Cuts and Jobs Act (TCJA or, more commonly, “the Trump tax cuts”), which became law in December 2017, are scheduled to expire this year. Conventional wisdom long held that, if President Trump were back in the White House and Republicans controlled Congress, they would extend the expiring provisions en masse. But that looks increasingly improbable for the simple reason that we cannot afford it.

The year before TCJA’s passage, the federal budget deficit was roughly $600 billion. That’s not nothing, to be sure, but at three percent of GDP it stood near the long-run average dating back to 1980. Interest payments on the national debt cost $240 billion that year, or roughly six percent of total federal spending. In that situation, Republicans seemed quite comfortable with a $1.5 trillion net reduction in tax revenue over the coming ten years, that would add directly to deficits and debt. The Wall Street Journal’s Richard Rubin provided a helpful refresher yesterday on how the negotiations proceeded:

House Republicans initially wanted a deficit-neutral approach but relented after their major revenue-raising proposal fell flat. Then-Sens. Pat Toomey (R., Pa.) and Bob Corker (R., Tenn.) cut the final deal, with Toomey seeking a larger number that banked on tax cuts leading to economic growth and Corker expressing concern about deficits. Their agreement set the limit at $1.5 trillion, and Congress wrote and passed the bill within that constraint.

(As an aside, please never call someone like Pat Toomey or Paul Ryan a “fiscal conservative” when their main legislative achievement was an enormous, unpaid-for tax cut. Instead, use a term like “anti-tax zealot.”)

Fast forward to 2024, the deficit for this year is forecasted to approach $2 trillion, or seven percent of GDP—the highest figure on record for the United States, outside of wars and pandemics and economic recoveries. Interest payments will approach $900 billion, roughly 13% of total federal spending and an amount larger than the defense budget. In short, a “fiscal crisis” is not some future threat to worry about; we are living in it. Forget about tax cuts, both House Budget Committee chairman Jodey Arrington (R-TX) and House Appropriations Committee chairman Tom Cole (R-OK) have gone on record in the past year acknowledging that tackling the budget deficit is going to require raising additional tax revenue.

Historically, Republicans might have pushed ahead with claims that tax cuts would generate enormous economic growth and even “pay for themselves.” But at issue here is a specific set of tax provisions that was already sold once on those grounds, and found sorely wanting. The decline in federal revenue after their adoption is plain for all to see: from 17.1% of GDP in 2017 to 16.3% in 2018 and 2019 and, post-pandemic, still at 16.5% in 2023.

The growth story is even more embarrassing. As I’ve documented at American Compass, former White House Council of Economic Advisers chairman Kevin Hassett was so excited to sell TCJA’s success that he took the stage at the American Economic Association’s 2019 Annual Meeting to present the evidence that it had delivered precisely in line with the economic models. He chose the metrics and the baseline against which he would measure TCJA’s effect. Sure enough, total vindication. “Last year we were saying that you should use these models to think what’s gonna happen next year,” explained Hassett, “and they say this is what the growth effect is going to be and here we are a year later and … it’s exactly what the models say.” To emphasize the point, he continued, “if you say the tax cuts aren’t working then you’re kind of in some kind of denial that you should think about.”