No, Republican Tax Cuts Did Not Contribute to the National Debt

Unless collecting more revenue makes the deficit larger

During his first term, Donald Trump signed a bill significantly reducing corporate tax rates and lowering personal income tax liability for most Americans. He has promised to further lower income tax rates for corporations and individuals in his forthcoming second term.

This has provided the opportunity for Democrats and other opponents of tax reductions to make the perennial claim that tax cuts signed by Republican presidents have and will continue to blow up the national debt. This claim is demonstrably false.

There are some economic issues that provide room for argument depending upon which economic school one adheres to. However, this issue is not debatable. No tax cut signed by a Republican in the past fifty years has increased the debt more than it would have otherwise increased had the tax cut not been implemented.

It’s easy to understand why the public believes this superficially plausible claim. If the government is running deficit X under the current tax schedule and that tax schedule is reduced, the government will collect less revenue and the deficit will increase to X + less revenue collected. It makes perfect sense.

The only problem is it has never been the case that the government collected less revenue after a Republican tax cut. Never. Ever.

Don’t take my word for it. Just look at tax receipts. Since this tax cut/debt fable began during the Reagan years, look at tax receipts after the tax cuts he signed. They increased so significantly that by his last year in office the government was collecting almost double the amount of taxes it was collecting in Carter’s last year.

While this may seem counterintuitive, it is nevertheless true. The explanation probably lies in what has come to be known as the “Laffer Curve,” named after economist Art Laffer. This theory also has its own little Democratic Party myth built into it. Democrats like to claim Laffer was wrong when he said “tax cuts pay for themselves.” This myth is wrong in two ways.

First, Laffer never said “tax cuts pay for themselves.” He said that as income tax percentages increased, there was a certain point beyond which the government collects less revenue. Therefore, if current tax rates are higher than that inflection point, then the government will actually collect more revenue by lowering the tax rate. All available evidence suggests he was correct.

The explanation lies in incentives. The higher tax rates are at the top of the rate scale, the less incentive people have to invest their savings. With less investment comes less production, therefore less income earned, therefore less income taxes collected. With low tax rates, government revenues will increase as the rate is raised. At a certain point, revenues will cease increasing and begin to incline as investors are incentivized to simply consumer their savings rather than hand them over to the government.

The second reason Democrats are wrong is that tax cuts do indeed pay for themselves, even though this was not Laffer’s claim. Had spending remained the same during the Reagan administration or even merely increased at the same rate as it had under Carter, then deficits during the Reagan years would have decreased. The government would be collecting more revenue than it would without the tax cuts and therefore running smaller deficits.

The reason deficits and the debt exploded under Reagan and subsequent Republican presidents wasn’t tax cuts but spending. Spending increased at almost twice the rate while Reagan was president as it had under Carter. This has been the case for every Republican president in the postwar era except Eisenhower (the metric here is somewhat skewed by WWII spending preceding his administration).

This same scenario applies to Trump’s tax cut. The federal government collected more revenue in every year of Trump’s first term than it had in any year during Obama’s two terms. Deficits and debts exploded under Trump for the same reason they did under Reagan: Trump increased spending at almost twice the rate it increased on average under Obama even before 2020.

Again, this is not debatable. From 2017-19, federal spending increased an average of about $200 billion per year. Over Obama’s eight-year administration, it averaged about $112 billion/year. There were years during the Obama administration during which spending actually decreased year over year. Some credit for this must go to the Republican Congress but the numbers are the numbers.

In fact, there is a striking similarity between the Obama and Biden administrations on spending. Both entered office on the heels of massive spending bills signed by their Republican predecessors in response to a supposed “once-in-a-lifetime crisis.” Both spent more in their first years in office than their predecessor did in his last, but then spent less in subsequent years. Both increased spending in their final years but overall increased federal spending at a far lower percentage rate than their Republican predecessors.

There have been only two brief periods when tax receipts decreased year over year in the postwar era. The first was during George W. Bush’s first term following the Dotcom and 9/11 crashes and subsequent recessions. The federal government collected slightly less each year during Bush’s first term than it had during the last two years of Bill Clinton’s second term. And it is true that Bush signed a decrease in marginal income tax rates.

That the tax cut had nothing to do with the decrease in revenue is obvious for three reasons. First, the revenue decrease began in Bush’s first year in office, before the tax cut took effect. Second, as soon as the post Dotcom/9/11 recession was over, tax receipts exploded under the same tax schedule and continued increasing for the rest of Bush’s term.

Third, we saw the same decrease in tax receipts during Obama’s first term, under the same tax schedule, following the 2008 financial crisis. As before, as soon as that recession ended and under the same tax schedule, the federal government began collecting more revenues than it had in any year during the Bush or Clinton administrations.

Finally, one may point out that inflation has something to do with increasing tax revenues. However, price inflation rates have nowhere near accounted for the receipt or outlay trends discussed above.

The bottom line is income tax rate cuts decrease deficits because they result in more revenue being collected. The problem has been spending has increased much faster while Republicans have held the White House than it has under Democratic administrations.

Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?