Writing last month about the explosive growth of a national debt that’s approaching $29 trillion, I put the blame on America’s two fiscally reckless political parties. Republicans and Democrats alike keep enlarging the federal budget, spending more and more money the government doesn’t have and steadily engulfing the nation in red ink.
The response from many readers was to scoff at my failure to mention tax cuts — especially the 2017 Tax Cuts and Jobs Act, signed by President Trump, which lowered individual and corporate tax rates. “You blame the government debt entirely on government spending,” wrote one correspondent. “You conveniently fail to mention the cuts in taxation.” Admonished another: “What is irresponsible is not investing in America’s infrastructure, education, and health, but the refusal to pay for it with tax increases on those who can afford it.”
These are popular sentiments, especially among liberals. President Biden faults “unpaid tax cuts” as a key driver of federal budget deficits. Congressional Democrats are pushing hard to hike taxes on corporations and high-earning households. To those who lean left, it may seem obvious that the Trump-era cut in tax rates starved the federal government of needed revenues, and that if only businesses and the wealthy paid their “fair share,” it wouldn’t be necessary for Washington to borrow so heavily.
The latest data from the Congressional Budget Office explode that illusion.
In its report on fiscal 2021, which ended Sept. 30, the CBO estimates that federal revenues soared by more than 18 percent, the steepest one-year increase in 44 years. The government collected $627 billion more than it did in fiscal 2020, pulling in a record-high $4.05 trillion.
Tax collections surged pretty much across the board. Individual income taxes were up $443 billion, a 27.5 percent spike. Even compared with 2019 — the last pre-pandemic year, when the economy was at full throttle — the 2021 tax haul is a third of a trillion dollars higher. Corporate income taxes are way up as well, to $370 billion in 2021 from $212 billion in 2020: a whopping 75 percent increase. In fact, as the Tax Foundation points out, corporations paid $73 billion more in taxes last year than they paid the year before Congress cut their taxes. All told, federal tax collections last year amounted to 18.1 percent of gross domestic product, the highest level since 2001.
Thus a lesson of economic history has been repeated. Lower tax rates can yield higher tax revenues.
There was a time when Democrats championed that message. “It is a paradoxical truth,” President Kennedy told the Economic Club of New York in 1962, “that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.” The tax cuts JFK campaigned for were eventually embodied in the Revenue Act of 1964. Sure enough, the reduction of individual and corporate tax rates led to a boost in federal revenues, from $113 billion in 1964 to $158 billion in 1968, a jump of nearly 40 percent.
With all due respect to my indignant interlocutors, irresponsible tax cuts are not fueling America’s metastasizing national debt. Irresponsible budget outlays are. The federal government has a too-much-spending problem, not a too-little-revenue problem. And despite the endless clamor about how the rich don’t shoulder an equitable share of the tax burden, the overwhelming majority of the tax revenues gushing into the Treasury are paid by the well-to-do.
“The share of taxes paid by higher-income households exceeded their share of income; the opposite is true for lower-income households,” noted the CBO in August. “In 2018, households in the highest quintile received 55 percent of income before transfers and taxes and paid 70 percent of federal taxes.”
For the richest of the rich, the disparity between share of income earned and share of taxes paid is even more striking. The top 1 percent of taxpayers earned 21 percent of the nation’s income in 2018 (the year following passage of the 2017 tax cuts), yet they paid 40 percent of all federal income taxes. Contra Representative Alexandria Ocasio-Cortez of New York, “Tax the Rich” isn’t a prescription for needed reform, but a summary of existing policy.
Americans, particularly rich Americans, are sending tax dollars to Washington at record-busting levels. But tax revenues, abundant as they are, can’t keep up with Washington’s out-of-control outlays. Profligate Republicans and spendthrift Democrats are beggaring the nation with headlong spending. Reining in that spending is our most urgent financial priority. If only we had political leaders to say so.