- The Treasury Department reported that the budget deficit grew to $US779 billion in fiscal 2018.
- A primary reason for the increase in the deficit was a decrease in revenue due to the GOP tax law.
- The evidence so far contradicts Republicans leaders and the Trump administration’s argument that the tax law would pay for itself.
- While there may still be a revenue boost from the law, the early returns do not look encouraging, and most forecasters expect the deficit to grow.
Republicans said their tax law was supposed to pay for itself. But according to new data from the Treasury Department, their overhaul of the tax code isn’t producing the desired result.
The Treasury said the budget deficit hit $US779 billion for fiscal 2018 – which was October 2017 through September 2018 – the highest level since 2012.
A significant part of the deficit increase was due to anemic revenue growth, largely from big tax cuts from the new GOP-led tax law, which went into effect earlier this year.
Particularly significant is the corporate tax side of the ledger, where the effects of the law have already taken hold. While most Americans have not yet filed their taxes under the new system, corporations pay taxes quarterly and have already been operating under the new lower rate.
According to Treasury data, tax revenue from corporate returns dropped 31% in fiscal 2018 compared with fiscal 2017. Meanwhile, individual tax revenue was up 6.1%, and total revenue increased by just 0.4% from fiscal 2017.
An analysis by the Committee for a Responsible Federal Budget found that the revenue increase was historically low.
“This revenue growth rate is the eighth lowest in the past 50 years, and the seven lower years either coincided with a recession or tax cuts/expiring tax increases enacted shortly after a recession,” the report said. “As we have noted, though, even this slight revenue growth understates how much the 2017 tax law is reducing revenue since the fiscal year totals include revenue raised from the pre-tax law code.”
Republican leaders and the Trump administration said last year that the increased economic growth due to the tax bill would cause more money to flow to businesses and people, producing more tax revenue.
Even after several nonpartisan think tanks and the nonpartisan Congressional Budget Office estimated that the bill would add to the federal deficit, Republican leaders remained steadfast in saying the tax cuts would eventually pay for themselves or even reduce the deficit.
“I not only don’t think it will increase the deficit, I think it will be beyond revenue-neutral,” Senate Majority Leader Mitch McConnell said on December 4. “In other words, I think it will produce more than enough to fill that gap.”
In August, Treasury Secretary Steven Mnuchin said the law would end up reducing the deficit.
“So we’re humming along on where projections are, and as I’ve said, at 3% economic growth, this tax plan will not only pay for itself but in fact create additional revenue for the government,” he said in an interview with CNBC.
The CBO expects the deficit to expand to $US973 billion in fiscal 2019, with $US228 billion due to reduced revenue as a result of the GOP tax law.
But it’s still early – the tax law hasn’t yet been in effect for a full year, and a revenue boost could come later.
Daniel Clifton, an expert on economic policy at Strategas Research Partners, pointed out that the positive economic feedback and revenue boost from the 2003 tax-cut package did not take effect until a full year after it passed.
“Over 5 years, the projected $US317bn cost of the 03 tax cut never materialised,” Clifton tweeted Tuesday, adding that because of higher levels of economic growth and capital gains tax revenue, tax revenue exceeded pre-tax-cut expectations.
“The 17 tax change did not include cap gains tax cut,” he said. “Feedback effect will be less but strong.”
But for the revenue side of the ledger to pick up significantly, there would need to be a sustained increase in gross-domestic-product growth, which few forecasters are projecting.