The Big Beautiful Bill

 

      

The most important feature of the so-called big, beautiful budget bill recently passed by Congress and signed into law by President Trump was the extension of the tax reforms passed in 2017 during the President's first administration. Although not one Democrat in either the House of Representatives or the Senate voted for the bill, it is interesting to note that they did nothing to change the 2017 tax reforms during the Biden administration.

It is true that Democrat progressives always complain about tax breaks for billionaires but their inaction spoke louder than their words. Perhaps, they realized that a cut in tax rates did not necessarily result in lower tax revenues for the government. In 2016 Federal tax revenues were $3.3 Trillion. In 2020, largely because of the pandemic, they only rose to $3.4 Trillion, but in 2024 Federal tax revenues rose to an astounding $4.9 Trillion, an almost 50% increase over pre-tax reform days. Why did cutting tax rates lead to increased Federal income?

There is a difference between raising tax rates and raising taxes. An increase in tax rates on the rich or anyone else does not always lead to increased government revenues. Historically, almost the opposite has occurred. Over 60 years ago, President Kennedy lowered tax rates and Federal revenues grew dramatically. President Reagan did the same thing with a similar result after he took office.

Ironically, for conservatives it would appear that reductions in tax rates lead to increased government revenues and only enable more government spending. At the same time, it would appear that raising tax rates would actually lead to less revenue for Washington? Why should this be so?

By now it should be obvious that the lower tax rates of the 2017 Trump reform grew the economy and produced greater revenues for the Federal government. In pre-reform 2016 the $3.3 Trillion in federal revenue amounted to 17.8% of Gross National Product (GDP), while in 2024 the $4.9 Trillion federal revenues amounted to just 17% of GDP. In other words, the growth in the economy that resulted from lower tax rates, both corporate and individual, generated more federal tax revenue. 

But there is another factor. Increasing tax rates only increases tax avoidance strategies both legal and illegal. Increasing tax rates on the rich or anyone else will only encourage more tax avoidance since the potential reward gets greater. If someone’s income is taxed at a 50% rate rather than 25%, the potential reward for deferring, sheltering, or otherwise hiding income has doubled. 

No one has ever asked Hillary Clinton or her husband why they felt a need to set up the tax exempt Clinton Foundation for their charitable work. Many financial planners advise high-end clients to set up foundations for tax purposes. We all know of the Gates foundation and the Buffett foundation. Theoretically, since these foundations pay no taxes, more of their money can be used for the charities they wish to support.

There are other legitimate ways for people to shelter income from taxation. For example, taxable withdrawals from IRAs and other retirement plans can be deferred until age 70, and after that only minimum withdrawals need be taken over one’s lifetime. Raising tax rates only discourages people from taking money out of IRAs. Lowering tax rates would actually increase taxable withdrawals from IRAs and 401k type plans.

President Trump is also right about lowering the Corporate tax rate. Corporations actually don’t pay taxes. The taxes are figured into the price of what their customers pay in the same way that the real estate taxes paid by landlords come out of the rent paid by tenants. Higher corporate taxes are inevitably passed on to the consumer. People who worry that tariffs will cause inflation, never seem to worry that corporate taxes might be inflationary.

Also, corporate accountants are paid to find ways to create strategies that will minimize corporate tax liability. A higher tax rate will inevitably lead to more and more drastic measures. When states raise corporate tax rates, corporations move to more tax friendly states. Noticeable in recent years has been the exodus of corporations from high tax states like California and New York to lower tax states like Texas and Florida.

There was much more in the big, beautiful bill but I will save the discussion of Medicaid reform, SALT deductions, tips, and senior relief for another day.

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