History lesson: Do big tax cuts pay for themselves?

Politician Direct Taxes_Health_Care_QA_53897.jpg-bb8ce History lesson: Do big tax cuts pay for themselves? Politics Washington Post
(Associated Press)

“It’s not just economic theory but economic history. … The bottom line is we will be able to fill any deficit hole with additional revenues. And we basically saw the same during the Reagan tax cut, frankly the Kennedy tax cut. You can even go back to the Coolidge tax cut. We will be able to raise more revenues.”
— Rep. Jeb Hensarling (R-Tex.), in an interview with Bloomberg News, Nov. 30, 2017

During an interview about a proposed “trigger” to stem tax cuts if the budget deficit unexpectedly widened, Rep. Jeb Hensarling (R-Tex.) made a reference to economic history that caught The Fact Checker’s attention.

Hensarling, chairman of the House Financial Services Committee, dismissed the trigger as a “uniquely bad idea” because it would leave businesses uncertain about their tax rates. Moreover, he predicted that “we will be able to fill any deficit hole with additional revenues,” citing the tax cuts engineered by Calvin Coolidge, John F. Kennedy and Ronald Reagan. He said that if a deficit widened, it could be handled with spending cuts, but he indicated he was not worried.

“If I thought that this would exacerbate the deficit, I would not support it,” he said. But the economic growth that would be created “will be more than enough to make up the static $1.5 trillion [deficit] over 10 years that this is being estimated.”

In making this claim, Hensarling is relying on the past when the present offers little support for his position.

The Joint Tax Committee produced a “dynamic score” — taking into account expected economic growth — of the Senate tax bill and found that only $400 billion of the $1.5 trillion would be recouped. Other private forecasters generally found similar results, with all suggesting at least an increase of $1 trillion in the deficit over 10 years. A letter by top Republican-leaning economists expressed support for the tax legislation but clearly indicated economic growth would not make up the entire gap: “The increased growth, in turn, would lead to greater taxable income and federal tax revenues, which would reduce the static cost of lost federal tax revenue from the reform.”

So what does the economic history show?

The Facts

We’re going to focus mostly on the Reagan era, as that is more recent and probably more relevant. The Coolidge tax cuts were almost a century ago, when the United States was just emerging as a world power and did not have much of a welfare state. Even the Kennedy cuts came before the creation of Medicare and the expansion of Social Security, which has boosted payroll tax collections.

All three tax cuts involved significant reductions in individual income tax rates — which is not a feature of the current tax legislation, though corporate rates would be significantly reduced.

Coolidge tax cuts
These cuts were engineered by Treasury Secretary Andrew Mellon under President Warren Harding, who died in 1923, and Coolidge. The top tax rate was 77 percent (for income above $1 million) and then was sharply cut in a series of tax acts in 1921, 1924 and 1926. Eventually the top tax rate fell to 24 percent by 1929.