The trouble with the GOP ‘grow our way out of debt’ mantra

When it comes to solving our outrageous and shocking budget deficit/national debt problem, tax policy really doesn’t matter.

I wish it did. But facts are stubborn things, as John Adams said in court, and the data since 1962 doesn’t support the hypothesis that cutting taxes generates massive new flows of tax revenue to Washington, D.C.

It is just math. Not politics.

Democrats love to deflect voter attention to “Taxes!” because it is easier to declare class warfare since they love spending your tax money. Republicans like to cut taxes because they trust people to deal with their money better than government does ― and they like to cut taxes.

“Make the rich pay their ‘fair share!’” (whatever that is), bray the Democrats. “Grow our way out of budget deficits with huge tax cuts!” trumpet the Republicans.

Neither makes much ― if any ― difference when it comes to balancing the budget. Tax revenues flowing to D.C. averaged 17.9% of GDP since 1962, regardless of tax policy. No matter how progressive or conservative a Congress or president has been, any combination of individual, corporate, payroll, excise, customs and death tax schemes, rates or policies has yielded about the same amount of revenue to the dreaded IRS in Washington, D.C., relative to GDP.

If tax cuts yielded enough new revenue to permanently raise tax collections to 20% of GDP, a logical conclusion could be that they worked to generate more consistent tax income.

But they haven’t.

Republicans think if they cut tax rates far enough, economic activity will explode and generate massive amounts of new tax revenue, which will eventually balance our budget.

Except it never happens. Tax cuts do not generate statistically significant higher amounts of tax revenue received by Washington in years one or two after enactment simply because it takes time for businesses and individuals to react and plan differently.

Economic activity and cycles are the prime determinants in year-over-year percentage increases (or decreases) of tax revenue growth rates, not marginal tax rates. Tax revenues fall into the tank when recessions hit, and tax revenues rise when economic recovery takes root and people start working again.

Double-digit tax revenue increases in the past 60 years have occurred usually between 18 months and two years after the trough of a previous recession. Tax revenues soared 18% in 2021 and 21% in 2022 under President Joe Biden, not because of anything he or the Democratic Congress did but solely because the economy started to heal after the closure of everything in 2020 and businesses hired back most of the workers they laid off during COVID.

Lower taxes are better than higher taxes for everyone on an individual basis, don’t get me wrong. Any American clamoring for higher taxes on anyone has missed the essence of the American Revolution entirely.

However, if we want all the stuff everyone says we want, such as good roads, clean air, a military to keep us safe and health care for the aged and indigent, we have to pay for it instead of passing the debt on to our children and grandchildren like we Boomers are The Generation of Chiselers and Deadbeats.

One major problem with the GOP tax cut/revenue growth mantra is that it doesn’t account for the makeup of tax collection and sources of payment.

Payroll taxes accounted for 17% of all revenues in 1962. Today, payroll taxes dedicated to solely fund entitlement programs account for more than 35% of total revenues collected ― and even those streams of income are falling short of their goal.

Had payroll taxes not been doubled in 1983, our annual deficits would be $3 trillion today instead of “just” $2 trillion.

A payroll tax is a true “flat-rate tax” if there ever was one. Everyone, rich or poor, has to pay it from dollar one earned if they take a salary. There is no way to get around them with fancy tax shelters or offsets if you are a wage-earning person.

No one ever suggests cutting payroll taxes as a way to generate more tax revenue for Washington, although it would follow the same line of thinking as cutting income taxes.

We will never “grow” our way out of budget purgatory with tax cuts alone, no matter how many times Republicans in Congress huff and puff about them. Tax revenues will grow 6.5% on average each year. As long as Congress doesn’t increase spending by more than 6.5% annually, we can start to make a small dent in solving our long-term debt problem.

We just don’t need to change tax policy every other year. When it comes to balancing the budget, tax policy doesn’t matter.

Being fiscal conservative adherents to the Constitution does.