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Data vs. Tax Cut and Budget Balance Mythologies

Summary:
In the current discourse, there seems to be some amnesia with respect to when tax cuts occurred, why they occurred, and how they affected Federal budget deficits. Here is some data (read comments to this post). Figure 1: Federal budget balance as share of GDP (blue), cyclically adjusted budget balance as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations. EGTRRA is the Economic Growth and Tax Relief Reconciliation Act, JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act. Some people have argued that these tax cut acts actually improved the budget balance (or increased tax revenues). The data shown above argues against this point (as does a large empirical literature).

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In the current discourse, there seems to be some amnesia with respect to when tax cuts occurred, why they occurred, and how they affected Federal budget deficits. Here is some data (read comments to this post).

Data vs. Tax Cut and Budget Balance Mythologies
Figure 1: Federal budget balance as share of GDP (blue), cyclically adjusted budget balance as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations.

EGTRRA is the Economic Growth and Tax Relief Reconciliation Act, JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act. Some people have argued that these tax cut acts actually improved the budget balance (or increased tax revenues). The data shown above argues against this point (as does a large empirical literature).

Addendum: And here are the revenue counterparts.

Data vs. Tax Cut and Budget Balance MythologiesFigure 2: Federal revenue as share of GDP (blue), cyclically adjusted revenues as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. [JGTRRA arrow corrected 6PM] Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations.

Note the discrete drops in cyclically adjusted revenues at the advent of the GW Bush tax cuts.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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