April 15, 2019 was a month of reckoning for the Tax Cuts and Jobs Act of 2017. That was the first time taxpayers had to pony up their unpaid taxes on income earned in the first year under the new law. We know that more than 80% of taxpayers received a cut relative to the prior year, but we had so far been unable to gauge the effect on government revenues. Simple reasoning says that when tax cuts are implemented, the government collects less money. This assumption uses “Static” budgeting, which does not account for changes in human behavior, and once again it has proven fallacious.
“Dynamic” analysis considers changes people make in response to external stimuli. Economically, when people have more money to spend, the confident consumer tends to purchase more merchandise and services. Companies prosper, profits rise, and taxes are paid on those profits. At the same time, hiring takes place, and more taxpayers are created. Concurrently, businesses are started and expanded, and the Treasury gets a share of all the new prosperity.
Proponents of the 2017 Act cited the probability that cutting taxes would actually enhance government revenues. This “Dynamic” budgeting proponents were basing their argument on history by pointing to the aftermath of tax cuts implemented by John F. Kennedy, Ronald Reagan, and George W. Bush.
Results of what actually happened during 2018 (and paid in April of 2019) were announced earlier this month, and the “Dynamic” scorers prevailed. According to Investors Business Daily, government revenue in April was $515 Billion, an increase year-over-year of 13%, and a new April record. Further, for the first 7 months of this fiscal year, revenues are up 11.5%. Payroll taxes are also up, increasing by 2.8%.
Now the CBO (Congressional Budget Office) is increasing its estimates for economic growth and revenue, having added an additional $1 Trillion to their earlier estimates. Congress forces the CBO to use Static Budgeting. It doesn’t take a rocket scientist to understand that a change to Dynamic Budgeting would produce more reliable results. Congress apparently has very few accomplished economists, and even fewer rocket scientists.
One additional complaint about cutting taxes was also dispelled in the recent CBO report. Claims that tax cuts went mostly to “the rich” didn’t pan out, as taxation became even more “progressive” after the 2017 Act. Right now, fewer people are living paycheck-to-paycheck than ever before, and the “Quality of Life Index” is at a 14-year high.
Tax cuts work every time they are tried. How much proof do we need to provide for Congress to make the lower rates permanent? Or, better yet, to further reduce our tax burden.Van Wie Financial is fee-only. For a reason.