Biggest Tax Cut Ever? Not So Fast, Treasury Paper Says

By Jonathan Nicholson

President Donald Trump has said the Republican-backed overhaul of the nation’s tax laws would yield the biggest tax cut in U.S. history. A Treasury Department analysis of past tax cuts, however, shows that the cut would probably have to be much larger to achieve that distinction.

Instead, according to estimates by tax and budget think tanks, the resulting loss in tax revenue would be smaller than Ronald Reagan’s 1981 tax cuts, and smaller than the 2012 “fiscal cliff” deal and the 2010 tax cut extension that preceded it.

The White House, though, said it is looking at the changes in tax rates, not the amount of revenue that would be forgone, when discussing the size of the tax proposal, and that that supports Trump’s claim.

‘Giant, Beautiful, Massive’

The proposal’s size will likely take on a higher profile in coming weeks as lawmakers begin to discuss tax reform’s thorniest issues in an attempt to pass an overhaul before 2018 begins. While Republican lawmakers in 2016 largely sold the overhaul as a revenue-neutral way to make the IRS code more efficient—and thus not a tax cut, at least in revenue terms—Trump has recently taken to touting it as either the biggest tax cut in history or, sometimes, merely the biggest since Ronald Reagan.

“My administration is working every day to lift the burdens on our companies and on our workers so that you can thrive, compete, and grow. And at the very center of that plan is a giant, beautiful, massive—the biggest ever in our country—tax cut,” Trump said in a speech to the National Association of Manufacturers Sept. 29.

Trump repeated the claim in a televised interview with Fox News host Sean Hannity Oct. 12. “It’s a reform, but it’s a massive tax cut,” he said. “This is the largest tax cut in the history of our country.”

On Oct. 11, Trump tweeted, “Republicans want the biggest tax cut in history & the WALL!”

In a speech in Indianapolis two days earlier, Trump said, “Before we go on to discuss the largest tax cut in our county’s history, I also want to provide a brief update on health care.”

Measured on revenue, the Republican tax plan would need to be much larger to be the biggest tax cut, according to a ranking of tax bills compiled by a Treasury Department analyst in 2006 and updated in 2013. Jerry Tempalski, with the department’s Office of Tax Analysis, ranked tax bills from the 1940s through 2012 by the amount of revenue raised or lost, as measured by several different metrics. Those included both dollar amounts, as well as the amounts in proportion to the size of the economy and as a proportion of projected federal revenue.

“The single best measure for most purposes is probably the revenue effect as a percentage of GDP, because it eliminates the effects of inflation, real economic growth, and the size of total federal receipts,” Tempalski wrote.

Reagan, Obama Tax Cuts

While data until 1968 weren’t as consistent compared with the post-1968 era, Tempalski wrote that the biggest tax bills were World War II-related. The Revenue Act of 1942 (Pub. L. No. 77-753) raised revenue equivalent to more than 5 percent of gross domestic product. At the war’s end, much of it was reversed, as the Revenue Act of 1945 (Pub. L. No. 79-214) cut tax revenue by 2.67 percent of GDP.

Post-1968, Tempalski’s rankings were led by the 1981 tax cut and the moves to either extend or make permanent the 2001 and 2003 Bush tax cuts.

The 1981 tax cut—the Economic Recovery Tax Act (Pub. L. No. 97-34)—was projected to cut revenue by 2.89 percent of GDP, while the fiscal cliff deal—the American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240)—was projected to cut revenue by 1.78 percent of GDP. That law made permanent most of the tax cuts enacted in 2001 and 2003 as temporary measures under President George W. Bush.

The 2010 tax cut—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. No. 111-312)—was the first, two-year extension of those tax cuts and the third-biggest tax cut in the post-1968 period in Tempalski’s rankings, at 1.31 percent of GDP. Tax-cut advocates often dismiss the 2010 and 2013 bills as not being true tax cuts because they mostly extended existing tax breaks, saying it was politically untenable to think those would be allowed to expire.

After those two bills, the next largest tax cut on the percentage of GDP basis was under President Jimmy Carter—the Revenue Act of 1978 (Pub. L. No. 95-600)—at 0.83 percent of GDP.

Corporate Rate Cut

Len Burman, co-founder of the nonpartisan Tax Policy Center and an institute fellow at the Urban Institute, said Reagan’s 1981 tax cut would be equivalent to about $7 trillion over 10 years in today’s dollars.

In contrast, estimates of the revenue loss from the GOP tax plan range from $1.5 trillion to $2.4 trillion over the next decade. The first figure is the amount in the Senate Budget Committee budget resolution that a tax cut would be allowed to increase the 10-year deficit and still pass the Senate with 51 votes. The bipartisan Committee for a Responsible Federal Budget has put the shortfall at $2.2 trillion, while the Tax Policy Center has put the gap at $2.4 trillion.

Translated into percentage of GDP figures, those estimates would equal 0.5 percent to 0.6 percent of GDP over 10 years.

Some lawmakers and Kevin Hassett, chairman of the White House’s Council of Economic Advisers, have questioned the accuracy of the Tax Policy Center estimates, saying important details of the plan that would affect the deficit estimate haven’t been settled on yet.

The White House also challenged the idea of using revenue as the yardstick of a tax cut. A White House spokeswoman emailed Bloomberg BNA Oct. 6 to say, “It’s the biggest rate cut when you include the corporate side since we’re cutting the corporate rate by 15 points.”

Asked if that meant the change in rates was the metric by which the administration was measuring the tax cut, the spokeswoman said, “It is one of the metrics we’re using.”

‘Terrible Idea’

On that basis, the proposal still draws a mixed comparison with the previous, largely revenue-neutral tax reform effort in 1986. Unless lawmakers include a higher fourth tax bracket, the GOP proposal would bring the individual income tax bracket down from 39.6 percent to 35 percent, a cut of 4.6 basis points, and the corporate income tax rate down to 20 percent from 35 percent, a decrease of 15 basis points. The Tax Reform Act of 1986 (Pub. L. No. 99-514) cut the top individual rate to 28 percent from 50 percent, a decrease of 22 basis points, and the corporate rate to 33 percent from 46 percent, a cut of 13 basis points.

In Burman’s view, aiming to have the largest tax cut in history is a misguided impulse.

“It’s a terrible idea,” Burman said. “Debt is about 75% of GDP, the highest level in about 70 years, and unlike 70 years ago, we can’t look forward to a baby boom to spur GDP growth in decades ahead. Instead, we are retiring, putting huge demands on the federal budget.”

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

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