The biggest tax cut in history? Not quite.

President Donald Trump has bragged that the tax cuts Congress wants to pass this month would be the biggest in histor...

Posted: Dec 17, 2017 8:49 AM
Updated: Dec 17, 2017 8:49 AM

President Donald Trump has bragged that the tax cuts Congress wants to pass this month would be the biggest in history.

But arguably, President Obama passed a larger tax cut -- by making most of President George W. Bush's cuts permanent. President Reagan definitely did. And Presidents Kennedy and Johnson probably did, too.

Trump has said the tax cuts Congress is debating would be the biggest ever

They would not, according to the way the government measures tax cuts

"It will be the biggest tax decrease, or tax cut, in the history of our country," Trump said Friday at the White House.

Tax analysts have been unequivocal that Trump's claim is not true. (Note: The exact details of the legislation Congress wants to pass next week are set to be publicly released Friday evening.)

"While it is not the largest tax cut ever, it is the most poorly timed giant tax cut in history," said Leonard Burman, institute fellow at the nonpartisan Tax Policy Center. "The economy is near full employment and the national debt is at a postwar record and rising fast."

An analysis by the Committee for a Responsible Federal Budget found that Trump's cut is the eighth largest since 1918.

Even the Treasury Department has weighed in on the debate. Though that would be Bush's and Obama's Treasury departments, not Trump's. The Treasury Department released several iterations of a paper between 2006 and 2013 that measured the size of past tax cuts.

The Treasury reports found that, since 1968, three other tax cut bills have been bigger: Reagan's 1981 cuts, and two bills passed by Obama to extend the Bush tax cuts. Between 1940 and 1967, when the data is less reliable, three tax cuts were larger, two of them after the war, when rates were lowered again.

The Treasury measured the sizes of tax cuts by looking at the revenue effects of the bills as a percentage of gross domestic product -- in other words, how much federal revenue the bill cuts away as a portion of the economy. Reagan's 1981 cut was 2.9% of GDP. Obama's tax cut extensions in 2010 and 2012 were 1.3% and 1.8%, respectively.

Trump's tax cut, by contrast, if it passes, is estimated to be about 1% of GDP per year. Even excluding Obama's cuts -- which were really extensions of previous cuts -- Trump's tax reform bill will have nowhere near the effect on revenue that Reagan's did. Trump's cuts for individuals are temporary in the Senate's legislation. So, like Bush, he's really setting himself up for another president to get to take credit for his tax legislation in 2025.

When multiple tax cuts and increases by the same President are grouped, Trump's cut shrinks further. Bush's cuts come in at 1.4% of GDP. Even accounting for Reagan's rollbacks after 1981, his first-term cuts exceed Trump's bill.

The calculation for Trump's bill's revenue effect is made by taking the Joint Committee on Taxation's estimated budgetary effects for the Senate bill from 2019 through 2022 and dividing by the Congressional Budget Office's cumulative GDP projections through the same period, while factoring in the joint committee's estimated growth effects. A four-year window average is used because it is the same baseline the Treasury report uses, and it is also the period where the bill costs the most. The cost of the final bill Congress passes is likely to be similar to the Senate bill's.

All calculations, including those in the Treasury report, start with the static estimates of the bills. They don't try to estimate economic effects -- just the revenue effect of the legislation.

Part of the reason the current proposals have less of a cut than previous bills is because of how the legislation is being passed. Republicans are using "budget reconciliation" to get it passed without Democratic votes. That allows the GOP to bypass a filibuster, but it also reduces how deep any cuts can be. "Particularly for a bill like this, large timing gimmicks, like the sunset, become really important," said Greg Leiserson, a former Treasury economist who's the director of tax policy at the Washington Center for Equitable Growth.

Reagan, the saint of "trickle-down economics," cut rates to corporations and to individuals across the board in 1981, giving the largest cuts to high earners. Reagan's 1986 tax reform made substantial changes to the tax code's structure to try to simplify it. Whether Reagan's cuts helped or hurt the rich and whether they are the reason for the growth the economy experienced during the 1980s is still a matter of debate.

Regardless, the Bush tax reductions borrowed heavily from the supply-side ideology that underpinned Reagan's cuts. Bush cut taxes across the board, lowered rates on dividends and capital gains, and changed the estate tax to benefit high earners. His cuts are generally credited with helping middle-class families and, even more, the wealthy. Bush is faulted, however, for driving increased inequality between low and high earners. When Obama extended most of the Bush cuts, several provisions that benefited high earners were allowed to expire.

Treasury Secretary Steve Mnuchin defended Trump's claim to CNN's Jake Tapper in November and made specific arguments about the sizes of specific elements of the plan, but did not have a compelling argument backing up the President's more general claim.

An open question, not answered by the Treasury report or answerable in the short-window in which the cuts are being pushed through, is whether this is the largest tax cut in history for corporations. Tax experts say it could be. The bill rolls back cuts on the individual side at the end of 2025 but keeps the corporate cuts in place.

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