Will the tax cuts pay for themselves?

0:01NPR

0:10As we were all putting coals on the barbecue and listening to the crackle of fireworks last week, it was hard to avoid the news that President Trump's one big beautiful bill act became law. What is notably big about it is how much it will cost the government. $3.4 trillion over 10 years, according to the Congressional Budget Office. The priciest section is extending a lot of the 2017 tax cuts and adding some new ones. But the Trump administration's Council of Economic Advisors says the cost is actually much, much lower. In fact, it says the tax cuts will pretty much pay for themselves. This is a multi-trillion dollar difference in opinion.

0:56And it's one you hear echoed by some Republican lawmakers. So we wanted to investigate this claim. This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Darian Woods. Today on the show, can the tax cuts pay for themselves? We talk to the guru of the school of thought, Arthur Laffer, and we fact check those claims with a tax economist.

1:39financial advisors looking to give their clients consistent results year in and year out. See the record at Vanguard.com slash audio. That's Vanguard.com slash audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor. This message comes from Dell Technologies. Your new Dell PC with Intel Core Ultra helps you handle a lot when your holiday to-dos get to be a lot. Luckily, the Dell PC helps you get it all done. Get yours at Dell.com slash holiday. A big part of the bill passed last week was the extension of the 2017 tax cuts from the first Trump administration. There were a lot of tax changes back then, but just to give you a flavor, the top personal income tax dropped a few percentage points to 37 percent.

2:27The standard deduction increased a lot, too, meaning most people didn't have to itemize all the little deductions they could make. That made life easier for a lot of us. The U.S. corporate tax rate was lowered a lot to 21 percent. But most of these big changes were temporary. So extending them now explains why the One Big Beautiful Bill Act is so expensive. Or does it? Hello! Glad you could join me. This is Arthur Laffer. He is a luminary in conservative circles. He advised Nixon and Reagan. I made a vow never to take money from government ever again. He still advises presidents though, including now Donald Trump, but he says that's pro bono.

3:09Those meetings cover a lot of ground. You're exhausted after coming out of a meeting with him. There's an economic chart that is Arthur Laffer's namesake, the Laffer curve. I didn't name it that, but I did use it a lot in the 60s and 70s and 80s. That curve shows that at some point a higher tax rate will actually result in a lower tax take for the government. That's because economic activity slows if it's taxed too much. In other words, sometimes tax cuts can pay for themselves. Now, it's controversial exactly where this point is. Is it 20 % or 80 %? But the general idea that lowering taxes can boost economic growth is why Arthur Laffer applauds the One Big Beautiful Bill Act.

3:53The big numbers there, I think, are quite good for the economy. I mean, we need to not have a big tax increase. We need that. I think it's done well on spending compared to the Democrats. The other side, it's not great. I'd like to see much bigger cuts. And at the heart of what appeals to Arthur is the big bills extension of the 2017 tax cuts. I think the tax cuts and jobs extension is really important for the prosperity of this country. In fact, Arthur claims that last time the tax cuts actually brought in more revenue. They paid for themselves more than that. They've created a lot of prosperity.

4:28Poverty rates went way down the lowest levels, especially for minorities, disenfranchised, lower educated youth. But you're saying about the 2017 tax cuts, that's not an uncontested view. No, it is uncontested. This is not about opinions. This is not about how you feel. This is about facts. Federal revenues went up after the bill passed. That's fact. Unemployment rates went down after the bill passed. That's fact. Our growth rate accelerated relative to the Eurozone. That's a fact. It's really just a myth that a tax cut can pay for itself. Erica York is vice president of federal tax policy at the Tax Foundation.

5:05If you lower tax rates on work, people might work some more. Or if you lower tax rates on business investment, businesses might invest more. You get a little bit more tax revenue than you otherwise would have, but you're still starting from that lower bar of the tax cut. So you may make up some revenue, but you're not going to pay for an entire tax cut. Erica says that, yes, tax revenue might have trended up after the 2017 tax cuts, or there might have been economic growth, but more sophisticated analysis is needed. The part that really matters is what would have happened without the tax cut. And you need to compare what did happen with the tax cut to the world without the tax cut.

5:46In other words, correlation doesn't mean causation. The world is complex. There are careful academic studies that go in and try to estimate that. And what they tell us, some of the best that have been done, I find that, yeah, it was good for the economy. It boosted business investment. It, to some extent, boosted wages. But when you control for all the different forces in the economy, the Tax Foundation has a much less rosy view. Our modeling of this current tax bill suggests that economic growth will pay for about 19 % of the tax cut. That 19 % is actually more optimistic than most other policy think tanks' estimates.

6:24Politicians make these wild claims. You know, the tax cuts are going to pay for themselves. The academics always pouring cold water over the big claims. Yeah. And then that gives people who are, you know, against the law, they say, well, the politicians were wrong. The story didn't play out. The tax cuts didn't do anything for growth. When really the truth is somewhere in between. Tax cuts did a little bit for growth. But we should be realistic about what to expect. Tax cuts aren't going to, like, juice the economy, but there are important improvements that can be made that make things better on the margin.

6:55We presented these types of studies to Arthur Laffer, but he was unmoved. These people are incorrect in their assessments of the economy. You know, tax rate reductions, especially on the upper ranges, are really ways of stimulating the growth in this economy. Look at what happened under Reagan. Look at what happened under Clinton. Look at what happened under Trump, under Kennedy. Have you ever heard of an economy taxed into prosperity? It's just not common sense and it's not good academics either. If Erica's right, though, the bill is set to cause government debt to soar higher and higher. It's significantly going to increase deficits.

7:34We're spending as much on interest payments on our debt as we are on defense. That's really eroding what the government can do because we're just spending so much to pay our debt. The Committee for a Responsible Federal Budget estimates that the One Big Beautiful Bill Act could mean the federal debt grows to around 130 percent of GDP by 2034. That's up from 117 percent under the status quo. Arthur Laffer, Donald Trump and the President's Council of Economic Advisers don't believe that. They think growth unleashed in the economy will offset the lower tax rates. On the other side, you have Erica York and the Tax Foundation, the Center on Budget and Policy Priorities, the Tax Policy Center, the Brookings Institution.

8:18You also have the Congressional Budget Office, the Joint Committee on Taxation, the Penn Wharton Budget Model and the Budget Lab at Yale. Pretty much every mainstream budget think tank in the U.S. They all come to the same conclusion. These tax cuts mean less money for government. We'll be digging into the One Big Beautiful Bill Act over the coming weeks, learning how it affects U.S. businesses, workers, and you. Stay tuned. This episode was produced by Cooper Katz-McKim with engineering by Robert Rodriguez. It was fact-taxed by Corey Bridges. Kate McCannon edits the show, and The Indicator is a production of NPR.

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