In What Sense Is Last Year’s Tax Reform Paying for Itself?

The op-ed piece entitled “Tax Reform Is Covering Its Costs” by Edward Conrad is careful about its use of stock and flow variables, and comes to the conclusion that it is.

Last week the Congressional Budget Office released a 10-year forecast—the first to assess the effects of tax reform after one year of hard results. Compared with its prereform projection, the CBO now expects annual GDP growth to be almost $750 billion higher by 2027, the last year of its prior forecast. A strong case can be made that tax reform played a predominant role in accelerating GDP growth.

Do note that the CBO is supposed to be non-partisan, although most people think it leans a little towards the Democrats.

On the other side of the ledger, the CBO predicts the tax cuts will add $1.9 trillion of additional debt in the coming decade …

The first is a flow (since its GDP), while the second is a stock (since its debt). So they should not be directly compared.

However, the interest on the new debt will be a flow, and can be compared to GDP:

… and that the government will pay about $60 billion more in interest each year as a result.

How does this compare to tax revenue?

… The government is on pace to collect more than $120 billion each year from that additional $750 billion of GDP—much more than enough to cover the additional interest payments. Even if a significant portion of the projected GDP gains since 2017 are not the result of tax reform, the tax cut still pays for itself.

Do note that this is not a Laffer curve type of result (that would be that a lower tax rate brings in more tax revenue merely because the rate had been set too high). As argued in many posts on this blog last year, corporate tax rate reduction leads to increased investment because capital can be moved to where it earns the highest return, which in turn makes workers more productive.