The claim that tax cuts will pay for themselves through stronger economic growth is one of the key arguments used by supporters of the tax legislation being debated by Congress. But the historical and economic evidence indicate that this just isn’t the case.
One of the biggest criticisms of the Tax Cuts and Jobs Act is that it will balloon the national debt, which is already growing out of control. The legislation would add about $1.5 trillion to deficits over ten years. That is on top of the $10 trillion already forecast to be added to the debt over the next decade.
Advocates of the tax cuts dismiss the cost by arguing that they will spur substantial economic growth. According to this reasoning, the new growth will produce additional revenue that will cover the cost of the cuts. However, the evidence does not back up this claim.
First, let’s see what history tells us. Supporters of tax cuts often point to the past in arguing that they boosted revenue. Yet, independent studies of deficit-financed tax cuts in 1981 and the early 2000s found that they resulted in lower revenue and increased deficits.
Now, let’s look at the current situation. Several models of the tax legislation before Congress have been undertaken and all show it adding to the debt, even when the economic effects are factored in. No models show economic growth reaching the level needed to cover the cost of the tax cuts.
Tax reform done right can indeed produce lasting economic benefits. But it should be comprehensive tax reform that does not add to the national debt. Tax cuts that increase the debt will ultimately slow growth.
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