Paul L. Caron

Tuesday, October 16, 2018

NY Times: Budget Deficit Jumps 17% in 2018, Due To Declining Corporate Tax Revenues Following The Trump Tax Cuts

New York Times, Budget Deficit Jumps Nearly 17% in 2018:

The federal budget deficit swelled to $779 billion in fiscal year 2018, the Treasury Department said on Monday, driven in large part by a sharp decline in corporate tax revenues after the Trump tax cuts took effect.

The deficit rose nearly 17 percent year over year, from $666 billion in 2017. It is now on pace to top $1 trillion a year before the next presidential election, according to forecasts from the Trump administration and outside analysts. The deficit for the 2018 fiscal year, which ended Sept. 30, was the largest since 2012, when the economy and federal revenues were still recovering from the depths of the recession.

Administration officials attributed the deficit’s rise to greater federal spending, including the military and domestic budget increases that President Trump approved this year, not the $1.5 trillion tax cut. ...

Personal income tax collections rose slightly over the past fiscal year, the Treasury data show, though in September they were lower than they were a year ago. The big revenue drop came on the business side. Corporate tax revenues have fallen by a third from a comparable period a year ago, a direct consequence of the tax law signed last year, which reduced the top corporate rate to 21 percent from 35 percent. ...

Many Republicans, including Mr. Mnuchin, said during last year’s debate over tax policy that the proposed cuts would pay for themselves by producing faster economic growth and correspondingly higher federal revenues. Outside analysts disagreed. The Joint Committee on Taxation, the official tax scorekeeper of Congress, projected that the law would reduce revenues by $1 trillion, even when accounting for additional growth.

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Publius, you might have missed an important Supreme Court decision that the ObamaCare mandate was actually a tax, except when it isn't convenient to call it a tax. In addition, there was the Medicare Payroll Tax, tax penalties for no coverage (ahem, I mean "shared responsibility payment), and a host of others. >>

Further, Obama regulations strangled growth with his war on businesses. >>

I hope this helps.

Posted by: Woody | Oct 17, 2018 6:45:52 PM

Mr. Woody: What are you writing about? "We saw over eight years how increased taxes (mandates?) and regulations affected jobs and growth." The last time we had a significant increase in federal taxes was in 1993. We know what the GOP predicted would happen, and we know what actually happened.

Posted by: Publius Novus | Oct 17, 2018 12:10:47 PM

JM, taxes and debt have increased over the decades to fund the Great Society, a wasted stimulus, and various other vote-buying schemes on the mandatory spending side. There is always the same result that government spending increases more than tax increases and with no reduction in debt.

Now, you can believe the NY Times that the problem is that people and companies are never taxed enough, especially when a Republican is in office, or you can believe economic models and history, which shows that when people are allowed to keep more of what they earn that they use that incentive to earn more, which does translate into overall higher federal revenues -- as shown by honest appraisals covering periods longer than than nine months.

Would your solution be to increase taxes? We saw over eight years how increased taxes (mandates?) and regulations affected jobs and growth. Although Obama claims credit for the Trump 4.2% GDP growth, which is double his "new normal," the reality is what Obama and the NYT thinks is best is exactly backwards.

What works is to cut taxes and to, at least, hold the line on give-away programs, since the Democrats won't cut them, to give economic growth a chance to catch up.

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Climbing Out of Debt -- A new study offers more evidence that cutting spending is less harmful to growth than raising taxes

The bottom line is that reducing the debt-to-GDP ratio depends a lot on how the budget deficit is corrected. If a surplus is increased by raising taxes, the downturn in growth may be so large that it raises rather than reduces the debt-to-GDP ratio. Deficit reduction policies based on spending cuts, however, typically have almost no effect on output, so they are a sure bet for a reduction in debt to GDP.

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Federal Tax Revenues Hit Record Highs — Are Trump's Tax Cuts Paying For Themselves?

What these numbers do show is that all the hand-wringing about the impact of the tax cuts on federal deficits was based on wildly exaggerated estimates of revenue losses, which failed to take into account the fact that a faster growing economy would offset at least of the lost revenue. That's a point we've made repeatedly in this space.

Posted by: Woody | Oct 17, 2018 8:51:19 AM

@ Woody,

And if mandatory expenditures are growing, why does it make sense to CUT taxes with the consequence of LOSING revenue?

Posted by: JM | Oct 17, 2018 2:14:10 AM

The Tea Party could not be reached for comment...

Posted by: Unemployed Northeastern | Oct 16, 2018 7:06:40 PM

Deficits grow because mandatory spending for interest and entitlements keep growing, not because people and businesses aren't taxed enough. Currently, only 30% of the budget is discretionary spending. Here's a chart. >>

Posted by: Woody | Oct 16, 2018 6:37:46 PM