On the day the Trump administration released its fiscal 2020 budget, White House economic adviser Larry Kudlow misleadingly claimed that “overall revenues are up about 10 percent.” In fact, federal revenues are down since the Republican tax cuts became law.
Federal revenues were down slightly in calendar year 2018, the first full year under the Tax Cuts and Jobs Act, compared with the previous year, according to Treasury Department data. Federal receipts also were down slightly in the first five months of fiscal year 2019 compared with the same period a year ago, according to the Congressional Budget Office.
Kudlow, director of the National Economic Council, discussed federal revenue during a March 11 interview with Judy Woodruff, the host of PBS’ “NewsHour.” Earlier that day, the White House released its fiscal 2020 budget — which assumes stronger economic growth in 2019 than economic experts have estimated.
The White House budget expects real gross domestic product growth (which is adjusted for inflation) will be 3.2 percent in 2019 — nearly a full percentage point higher than the most recent median forecast of the Federal Reserve Board members and Federal Reserve Bank presidents. In a statement released Dec. 19, the Fed projected 2.3 percent growth in 2019.
Questioned about the budget’s rosy economic assumptions, Kudlow credited the Tax Cuts and Jobs Act, which President Donald Trump signed into law on Dec. 22, 2017, with strong economic growth in 2018 that he said will continue this year and beyond.
Woodruff, March 11: Well, you are hanging a lot of this on these tax cuts. But we now have a number of experts who are watching those tax receipt numbers that come in regularly. And they are saying that they do not add up to what is anything like the kind of growth that the administration had projected off these tax cuts.
Kudlow: Well, actually, overall revenues are up about 10 percent. So that’s a pretty good number.
We asked the White House how Kudlow arrived at a 10 percent increase in federal revenues, but we did not get a response. We suspect, however, that Kudlow is cherry-picking one month of data, ignoring the longer-term trend that shows revenues have slightly declined since the tax cuts took effect in January 2018.
First, let’s look at the bigger picture.
According to the Treasury Department’s monthly receipts, federal revenues totaled $3.33 trillion in calendar year 2018 — the first full year since the tax cuts became law – down slightly from $3.34 trillion in the previous calendar year.
The trend can also be seen in this fiscal year, which began Oct. 1, 2018. Receipts totaled $1.28 trillion during the first five months of fiscal year 2019 — “$4 billion less than during the same period last year,” according to the CBO’s monthly budget review for February released last week.
So, what is Kudlow talking about? It would appear he is referring to this line in the CBO report: “CBO estimates that receipts in February 2019 totaled $171 billion — $16 billion (or 10 percent) more than those in the same month last year.”
The Wall Street Journal editorial board called it “a February revenue surprise.”
But Alexander Arnon, a senior analyst at the nonpartisan Penn Wharton Budget Model, cautioned against putting too much stock in one month of revenue data — particularly February.
“There’s a lot of noise in month-to-month receipts so we don’t put much weight on any of these movements, especially since relatively little is collected in February compared with other months anyway,” Arnon, who previously worked at the CBO, told us in an email.
It is true that February is generally a slow month for revenues. The $155.6 billion in February 2018 was the smallest monthly amount that year — down $16 billion from February 2017, which was also the smallest that year at $171.7 billion.
“As to why relatively little is collected in February, it’s mostly about the timing of business tax payments (corporate taxes and individual income taxes on pass-through businesses),” Arnon said. “Businesses make payments based on their estimated tax liability roughly once per quarter: in January, April, June, and September.”
Not surprisingly, the federal government’s biggest month for revenue collections last year was April, when Uncle Sam took in $510.4 billion during the height of tax-filing season.
The Committee for a Responsible Federal Budget also warned about cherry-picking one month of revenue data.
“The February total should not be used as a barometer for the year,” CRFB spokesman Patrick Newton told us. “We prefer using longer periods, like annual numbers, because monthly totals are subject to fluctuations that aren’t relevant to the bigger picture: if a certain day fell on a weekend or if tax refunds are several weeks behind schedule.”
It is also worth noting that revenues are falling as a percentage of GDP.
In its summary of fiscal year 2018, which ended Sept. 30, CBO noted that revenues fell from 17.2 percent of GDP in 2017 to 16.4 percent in 2018 — “dropping below the average (17.4 percent) for the past 50 years.” The 16.4 percent was also the lowest since fiscal year 2012, according to CBO’s historical data.
The decline in revenues as a share of GDP resulted in a higher federal deficit in fiscal year 2018, in large part because of what Kudlow referred to in the PBS interview as “our supply-side tax cuts.”
The federal deficit in FY 2018 was $779 billion — a nearly 17 percent increase from FY 2017. According to the CBO, the Tax Cuts and Jobs Act was responsible for about $164 billion of the 2018 deficit.
“The decline in receipts in 2018 resulted from the enactment in December 2017 of Public Law 115-97, referred to in this report as the 2017 tax act,” the CBO said in its annual long-range economic forecast, which was released in January. “That law made many significant changes to the individual and corporate income tax systems. Those changes, on net, lowered taxes owed by most individuals and businesses beginning in calendar year 2018.”
In its report, CBO said it does not expect revenue as a percentage of GDP to reach 17.4 percent again until 2025, when most of the individual income tax changes in the tax law expire. (See table 4-1.)
Of course, we don’t know what the future holds. But we can say that federal revenues since the tax cut law went into effect are down slightly, and to claim otherwise is misleading, if not outright inaccurate.
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