GDP was growing before and after the Trump tax cut, so growth in tax revenue year over year was expected. The Trump tax cuts went into effect in 2018, and according to your link tax revenues increased from 3.32 to 3.33 trillion that year, which is a 0.3% increase. This was during a year when GDP grew by 5.2%. In other words, revenues fell behind GDP by 4.9%.
Note that I used nominal GDP growth because the linked article used nominal tax revenue. To adjust for inflation we subtract the inflation rate from both sides and we’d get the same 4.9% fallback in tax growth relative to GDP growth.
Oh yeah it's definitely debatable if tax revenue would have grown faster in a counterfactual without the cuts, but that debate is orthogonal to the point you were making about "blowing up the federal budget", which is strictly a function of receipts and outlays. If the receipts increased, then the budgets woes are clearly a result of increased outlays.
Federal tax receipts as a % of GDP has been largely flat since WW2:
Your link shows the ratio decreasing from 16.97% to 16.16% in 2018 when the bill went into effect. That’s a 5% decrease, which agrees with my above math.
Overall your chart shows the ratio has a range of 19.75% to 14.42% in the past 20 years, tracking changes to the tax code and business cycle, exactly in the way you’d expect. That’s a 36% difference between the min and max ie. not flat.
I think lawmakers supporting tax cuts try to claim that tax revenues are not sensitive to tax rates because it would be convenient if true when trying to pass a tax cut. The facts don’t bear it out, however.
I think the roots of this argument are in the theory of the Laffer Curve: https://en.m.wikipedia.org/wiki/Laffer_curve
The Laffer Curve was used to argue for tax cuts when the top marginal rate was 70%. People are still trying to make this argument, but I think they missed the part where it’s supposed to be a curve, so the result of cutting taxes from 70% is not the same as cutting them from 35%.
Right, everyone knows about the Laffer curve. It's hilariously simplistic.
> I think lawmakers supporting tax cuts try to claim that tax revenues are not sensitive to tax rates because it would be convenient if true when trying to pass a tax cut.
The point of the chart going back to WW2 is to show that it's a little more complicated and we can't draw conclusions either way.
And circling back to the original point of contention, spending is not function of GDP, or in theory it shouldn't be. Spending is a function of population. So if federal tax revenue increases even after a tax cut, but deficit increases, then the culprit isn't necessarily the tax cut, the culprit is the spending increase.
You also need to include inflation. Tax receipts actually fell on an inflation-adjusted basis in 2018. Absent any changes in government policy, you’d expect expenses to roughly follow inflation plus population growth, and revenues to roughly follow GDP.
> The point of the chart going back to WW2 is to show that it's a little more complicated and we can't draw conclusions either way.
I don’t think this is correct. Yes, the economy is complicated. No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit. A claim that cutting taxes won’t increase the deficit constrains you to make other claims according to the GDP = C + G + I + X equation, and we should demand that lawmakers be specific about those claims.
As I pointed out, the chart is not really flat. The line actually goes up and down.
> You also need to include inflation. Tax receipts actually fell on an inflation-adjusted basis in 2018. Absent any changes in government policy, you’d expect expenses to roughly follow inflation plus population growth, and revenues to roughly follow GDP.
Great point, but it increased again in 2019. In fact, inflation adjusted tax revenue has been increasing (with minor transient dips) throughout history[1]. You'll definitely find one-off variations, but the trend-line for inflation-adjusted Federal tax revenue is up-and-to-the-right.
> No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit...As I pointed out, the chart is not really flat. The line actually goes up and down.
It's complicated because the ups and downs don't perfectly correlate with tax policy. You can find moments where a decrease in tax revenue as a % of GDP coincide with a tax cut, but you can also find moments where a decrease in tax revenue as a % of GDP coincides with a tax hike and vice versa.
It's important because if you zoom out and look at Federal tax brackets over time since WW2, the US's inflation adjusted tax brackets went from 22%-92% in the 1950's[2] to 10%-37% in 2020[3], but Federal tax receipts as a % of GDP is flat / moderately increased over that period.
I think the long-term historical drop in the ratio of [top marginal rate on individual income] to [tax as a % of GDP] is mainly the result of these factors:
1) increased tax compliance
2) more tax deductions
Overall, you’d need to use a more comprehensive “area under the curve” analysis of every tax to predict the impact of tax policy on total tax revenue, and it would be surprising if it could be predicted based only on the top marginal rate.
A major source of short-term noise is the business cycle, where capital gains and corporate profits fluctuate much faster than GDP, and some automatic stabilizers decrease revenue.
It's not just the top marginal tax rate. The full bracket has fallen across the board, not just on the top marginal income tax payer.
> A major source of short-term noise is the business cycle, where capital gains and corporate profits fluctuate much faster than GDP, and some automatic stabilizers decrease revenue.
Yes, which is why it's tough to suss anything out from the minor variations between consecutive years, and it makes a little more sense to look at a longer time horizon.
Note that I used nominal GDP growth because the linked article used nominal tax revenue. To adjust for inflation we subtract the inflation rate from both sides and we’d get the same 4.9% fallback in tax growth relative to GDP growth.