Taxes

Biggest Tax Cuts Ever? Nice Try, Mr. President

The GOP's plan certainly isn't going to boost revenue, either.

Let's ask them.

Photographer: Alex Wong/Getty Images

The Tax Cuts and Jobs Act that Republicans hope to pass and have signed into law by the end of the year has been billed by President Donald Trump as "the biggest cuts ever in the history of this country" and attacked by critics as "deficit-exploding." Technically, though, it's not even the biggest tax cut of the past five years.

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That honor goes to the American Taxpayer Relief Act of 2012, which was actually signed into law by President Barack Obama on Jan. 2, 2013. It's something of a bogus distinction, given that the act mainly just extended provisions of 2001, 2003 and 2009 tax cuts that were due to expire. That is, it was not so much a tax cut as a prevention of planned tax increases. The same goes to some extent for the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

But even with those set aside, the Tax Cuts and Jobs Act still pales in comparison with President Ronald Reagan's 1981 tax cuts and the 1964 cuts generally identified with President John Kennedy, 1 and it is a bit smaller than, if you add them together, President George W. Bush's tax cuts of 2001 and 2003.

The Biggest Tax Cuts and Tax Hikes Since 1952

Revenue impact as a percentage of gross domestic product*

Sources: U.S. Treasury Office of Tax Analysis, Joint Committee on Taxation, Congressional Budget Office

*One-year estimates for 1964 and 1966 acts, four-year for the rest

The revenue estimates for past tax bills are from Jerry Tempalski of the Treasury Department's Office of Tax Analysis, who last updated them in February 2013. They do not attempt to incorporate any economic effects of the tax cuts or tax increases; they're just measures of how big the enacted cuts or increases were. The estimates are also available in current dollars and constant 2012 dollars, but percentage of gross domestic product seemed the best way to compare over time. I only included tax legislation with a revenue impact of 0.5 percent of GDP or more, which is why the landmark Tax Reform Act of 1986, which increased taxes just 0.01 percent of GDP over four years, doesn't show up. For the current tax bills, I used the Joint Committee on Taxation's revenue estimates (again, not incorporating any projected economic effects) and the Congressional Budget Office's most recent GDP forecasts.

I used 1952 as the cutoff date because most years from 1940 (the first year for which Tempalski's report has data) to 1951 featured a major tax hike or tax cut, and including all of them in the table would have been excessive. But yeah, yeah, I know, you want to see how those tax bills stack up too, right? Here you go!

The Biggest Tax Cuts and Tax Hikes, 1940-1951

Revenue impact as a percentage of gross domestic product*

Source: U.S. Treasury Office of Tax Analysis

*In first year after enactment

Man, Congress really knew how to raise and cut taxes in those days! It was mostly increases, of course, but even the tax cuts of 1945 and 1948 still leave this year's legislation in the shade. So, again, it's definitely not the biggest tax cut ever. Not even close. As for "deficit-exploding," well, I guess it depends on what you mean by "exploding." The deficit for the fiscal year that ended Sept. 30 was about 3.5 percent of GDP. If you assume no positive (or negative) economic effects from the tax cuts, they would thus cause the deficit to rise to about 4.4 percent of GDP. In sum, this is major tax legislation that is likely to have a major effect on tax revenue and possibly on the economy as whole. It does not, however, appear to be historic or unheard-of or unprecedented or any of those things.

How big the tax legislation's positive economic impacts might be has of course been the topic of much debate over the past few months, with tax-cut boosters in Congress and the administration claiming that they'll be so massive as to make the legislation revenue-neutral or even revenue-positive. That's highly unlikely. The most favorable serious economic analyses of the legislation so far, from the business-friendly Tax Foundation, estimate that the House version would reduce revenue by $1.08 trillion over the next decade and the Senate version by $516 billion. 2

The Tax Foundation has run this same economic model on several past tax bills, which makes for some interesting comparisons. The current legislation would increase long-run GDP by 3.7 percent (Senate version) or 3.5 percent (House version), according to the model. That compares with an estimated 8 percent GDP gain from the 1981 tax cut, and 6.2 percent from the 1964 tax cut and a 1962 precursor. The 2001 and 2003 tax cuts each increased long-term GDP by an estimated 2.3 percent, while the 1993 tax increase reduced it by 1.5 percent. Again, this is what the model says, not what actually happened, and other organizations have other models in which the current tax legislation doesn't look like nearly the growth booster that the Tax Foundation's model says it will be. 3 As the late statistician George Box used to say, "All models are wrong but some are useful."

Those flummoxed by or dubious of the economists' competing models sometimes opt instead to simply eyeball the changes in tax revenue after a tax cut or tax increase. I wrote earlier this week that this tool is often misused by tax-cut proponents who cherry-pick or otherwise misrepresent what the data shows. Armed with the lists of tax cuts and increases above, I set out to attempt a non-cherry-picked comparison of the inflation-adjusted changes in income tax revenue after key tax increases and tax cuts, as well as the pretty much revenue-neutral tax reform of 1986.

Tax Increases, Tax Cuts and Revenue

Annualized rate of change in real income tax revenue*

Sources: Office of Management and Budget, Bureau of Economic Analysis, author's calculations

*Adjusted using gross domestic product deflator

I still made some judgment calls to keep from overloading the chart, such as starting with the 1941 tax increase instead of the even bigger one a year later and ignoring the 1982 tax hike since it came just one year after a much-bigger tax cut. I also opted to ignore other federal revenues (Social Security and Medicare payroll taxes, excise taxes, Federal Reserve earnings, customs duties, estate taxes, etc.) even though they too are affected by the economic impacts of income tax changes because (1) payroll tax rates have, apart from the payroll tax holiday of 2011 and 2012, only gone up and sideways since the 1930s, and (2) those other revenue sources no longer amount to much.

The overall message of the chart seems to be that tax increases are more likely to result in increases in tax revenue than tax cuts are. Shocking, no? I think one could also read from this chart the message that, since the heroic era of income tax policy in the 1940s and early 1950s, these effects have become more muted. That is, when income taxes were going from 2.1 percent of GDP in 1940 to an all-time record of 13.7 percent in 1952, tax increases and cuts translated more directly into revenue increases and reductions than they have since. This could mean that we have been flirting with the point of diminishing returns on income taxes, and that there are limits (both political and economic) to how much more revenue can be wrung from them. It almost certainly doesn't mean, though, that this tax cut will increase revenue.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
  1. He proposed them in his 1963 State of the Union address, but it was his successor Lyndon Johnson who actually pushed the cuts through Congress after Kennedy's assassination.

  2. The Tax Foundation's economic analysis doesn't provide year-by-year numbers, so I can't calculate a four-year-average percentage-of-GDP estimate equivalent to the ones in the tables.

  3. The Tax Foundation's model has also been subjected to multiple criticisms by economist Greg Leiserson of the Center for Equitable Growth, which you can read about here, here, here and here.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net

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