ECO100 Exploring Tax Cuts, Jobs, and CBO in the News Discussion
Discussion Question: This has been the big macroeconomic question for the last two years: Will the Tax Cuts and Jobs Act of 2017 reduce deficits and what will happen to the U.S. debt? To simplify, tax revenue comes from multiplying a tax rate by the countrys income. The tax rate was cut in 2017. If income stayed the same, tax revenue would fall. But both of the main schools of thought in macroeconomics, the Keynesians and the Neoclassicals, believe that tax cuts will encourage economic growth and increase income (although for different reasons). The question now becomes this: Will income increase so much that tax revenues will increase even though the tax rate is lower? Note that since the tax cut we have seen a strong growth in employment, and very low unemployment rates. If the cut in the tax rate increases tax revenues, the deficit will shrink.Before the results were in, the answer to this question was unknown. People tried to forecast what would happen. This video shows one point of view regarding predictions on the subject:U.S. Deficit to Surpass $1 Trillion Two Years Ahead of Estimates, CBO Says As of March 2019, enough time has passed that we now have some actual evidence on what is starting to happen. The editorial pasted below, A February Revenue Surprise, explains this evidence. There are strong opinions on both sides.Here is the discussion question for you:A February Revenue SurpriseFederal tax receipts rose 10% from a year ago, in case you havent heard.By The Editorial Board, The Wall Street JournalMarch 10, 2019 6:22 p.m. ETA funny thing happened in February that you havent read about: Federal government tax receipts rose 10% to $171 billion, according to the Congressional Budget Office.How could that be? Isnt the GOP tax reform supposed to be robbing the government of tax revenue and causing deficits to explode? Well, that spin appears to be based on single-entry political bookkeeping.CBO says in its latest monthly budget review that individual income-tax withholding and payroll tax receipts rose 5% in February from a year earlier, while income-tax refunds fell 13%. The year-over-year increase is important because we are now getting the comparative results for the time period in which tax reform has been fully implemented. Tax receipts from rising incomes appear to have offset lower receipts from the cut in tax rates and 100% business expensing. The February revenue rise outstripped even a 7.3% spending increase from a year earlier, so the deficit declined by $12 billion in the month.The February trend may not continue, especially if the economy slows. Tax refunds in particular may increase as tax-filing season continues in this first year under the new rules. But its worth noting that CBO says tax receipts for the first five months of fiscal 2019, October-February, are essentially flat: down a mere $4 billion, or 0.3%.The budget deficit is rising because spending is soaringup nearly 6% or $142 billion more in the first five months of fiscal 2019. The bipartisan budget deal that traded more defense for more domestic spending is contributing more to deficits than tax reform.
