What? Barack Obama cut taxes when he was president?
If you’re an Obama critic, you might think President Donald Trump’s predecessor in the White House only raised taxes during his eight years in office. But right after getting re-elected in 2012, Obama signed a law called the American Taxpayer Relief Act, which extended a bunch of tax cuts that were due to expire. That law cost the U.S. Treasury about $321 billion per year, or about 1.8% of GDP. The other way of looking at it, of course, is that taxpayers kept $321 billion more of their own money than they would have otherwise.
Trump has promised “the biggest tax cut in U.S. history,” which is more Trumpian overstatement than usual. The cuts Trump has outlined would amount to $190 billion at the most, or a bit more than 1% of GDP, and they’ll probably come in way below that once Congressional negotiations are complete. As outlined, the Trump cuts would only be the eighth largest, as a percentage of GDP, in the last 100 years, according to the Committee for a Responsible Federal Budget.
If you don’t remember the Obama tax cuts, there’s a reason. Obama didn’t propose massive tax cuts, and sign his own plan into law. What he did was sign a law that made permanent tax cuts his predecessor, George W. Bush, had put into place. So in a way, Obama merely ratified tax cuts enacted by another president, largely because he had no choice — most consumers would have endured major tax increases had Obama refused to extend the cuts. But the law Obama signed offers an important lesson that’s relevant today, with Congress poised once again to cut taxes and push the national debt higher.
The Bush tax cuts of 2001 and 2003 essentially backed Obama into a corner, because they were temporary, with many due to expire at the end of 2012. Temporary tax cuts are a gimmick that lowers the nominal amount of revenue lost, since in theory, they expire at some point in the future and lost revenue is restored. But by letting such tax cuts expire, a future president would be foisting a giant tax increase on voters who have adjusted their budgets to comport with current reality, not a theoretical future. Everybody in Washington knows there’s really no such thing as a temporary tax cut, because no future president will let them lapse, at least not on the middle class. The only thing that’s temporary is the fake budget math that understates how much tax cuts add to the national debt.
An unprecedented tax cut is unnecessary
Republicans are under pressure to once again make some of their upcoming tax cuts temporary, to lower the overall price tag and comply with arcane Senate rules that put a cap on the amount a piece of legislation can add to the debt, if it’s to pass with a bare majority of 51 votes. They should consider the ultimate result of the cuts that were due to expire in 2012. The battle over what to do about those cuts generated the “fiscal cliff” drama that unnerved financial markets and eventually added trillions more to the national debt. Markets settled down once Washington steered away from the fiscal cliff, but the national debt went up and up. Here’s what that ghastly trend line looks like:
Trump, in fact, should stop talking about a tax cut of unprecedented size, because we don’t need one. The economy might not be soaring, but it’s growing steadily, job growth is strong and the stock market is on a prolonged tear. The biggest tax cut of the last century was Ronald Reagan’s in 1981, which came at a more appropriate time. Back then, the economy was in the midst of back-to-back recessions, consumers were shell-shocked by double-digit interest rates, and super-high income-tax rates were out of whack, anyway. No such conditions apply today.
The corporate tax does need to be reformed, to keep up with other advanced nations that have been slashing corporate taxes. But the tax burden on individual Americans has been declining over time and is relatively low. We all know, however, that a tax cut will feel good, no matter what the future cost. Trump knows we know, and figures we won’t mind a little exaggeration. Or even a lot of exaggeration.
Confidential tip line: email@example.com. Encrypted communication available.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman