Trump tax cut pushing deficit to $1 trillion

Collections plunge from corporations, sending government debt up to $1 trillion

The amount of corporate taxes collected has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted.

The amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted.

The reason is President Donald Trump’s tax cuts. The law introduced a standard corporate rate of 21 percent, down from a high of 35 percent, and allowed companies to immediately deduct many new investments. As companies operate with lower taxes and a greater ability to reduce what they owe, the federal government is receiving far less than it would have before the overhaul.

The Trump administration had said that the tax cuts would pay for themselves by generating increased revenue from faster economic growth, but the White House has acknowledged in recent weeks that the deficit is growing faster than it had expected. The Office of Management and Budget said this month that it had revised its forecasts from earlier this year to account for nearly $1 trillion of additional debt over the next decade — on average, almost $100 billion more a year in deficits.

In the trough of the Great Recession in 2009, when companies were laying off hundreds of thousands of workers each month, corporate tax collections plunged by almost a third. It was the largest quarterly drop since the Commerce Department began compiling the data in the

1940s. No other period came close — until this year.

From January to June this year, according to data from the Treasury Department, corporate tax payments fell by a third from the same period a year ago. The drop nearly reached a 75-year low as a share of the economy, according to federal data.

“If we hadn’t changed our tax system,” said Kimberly Clausing, an economics professor at Reed College in Portland, Oregon, who studies business taxation, “you would be expecting rising revenues.”

The corporate tax payments have been tumbling as Congress careens toward a fiscal showdown in September that will take more money to resolve.

Stopgap spending bill

The current spending bill that Trump signed earlier this year expires at the end of September, the end of the current fiscal year. Congress is unlikely to pass another comprehensive spending bill before then. Instead, Republican leaders will have to press for a stopgap spending bill if they want to prevent a government shutdown a month before the midterm elections.

And then there is the possibility of more new spending. Trump’s pledge of up to $12 billion in emergency relief for farmers hurt by the trade war is prompting new demands for relief for manufacturers, fishermen and others being hit by retaliatory tariffs from U.S. trading partners — all of which would require more government spending.

As the tax bill was debated last year, the Trump administration argued that losses from the cuts would be offset by increased economic growth. Companies would use money that had previously gone to taxes, the argument went, to invest in their businesses and workers, giving the government a smaller slice — but out of a bigger pie.

Growth is up for now

But the drop in tax payments has come as the U.S. economy is already the healthiest it has been since the crisis, raising questions about whether the deficit could balloon further if growth begins to slow. The Commerce Department on Friday will announce its first estimate of gross domestic product in the second quarter, and forecasters anticipate it could reach 5 percent, the highest rate since 2014. Analysts, however, expect growth to slow in the second half of the year, as interest rates continue to rise and trade tensions weigh on the economy.

There was some encouraging news on the front Wednesday: After months of escalation, Europe and the United States agreed to find a way to reduce tariffs and other barriers, although how that could weigh on growth remains to be seen.

“It is unwise to count on sustained revenues from growth that could easily prove to be a temporary sugar-high,” said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget in Washington, “particularly when it ignores the very real threat that the economy slows and we enter a downturn in a very vulnerable fiscal position.”

But administration officials are dismissing such concerns, arguing that they still expect economic activity to remain strong.

“We are very much looking forward to the second quarter GDP numbers, which we anticipate will keep us on track to a four-quarter growth rate over 3 percent for the first time in 13 years,” said Kevin Hassett, the chairman of the White House Council of Economic Advisers. “That’s a growth rate nobody thought was possible and we are glad to see the naysayers will be proved wrong.”

Hassett added that “the positive revenue feedback of higher growth is a longer-term effect, so it isn’t surprising” to see corporate tax receipts falling.

The new law has so far proved to be a boon for companies, with corporate profits after taxes at the highest level the U.S. has ever seen. (As a share of the economy, though, profits are still below their peak reached under President Barack Obama.)

White House officials say the new law, which changed how the United States taxes multinational companies that operate here, is spurring a wave of so-called repatriation — businesses returning money to the United States that they had booked on their balance sheets abroad in order to defer American taxes.

White House: It works

In the first quarter of this year, multinationals repatriated $306 billion, in the form of dividends. That was $270 billion above the average quarterly amount over the last five years. White House officials say that’s a sign that the tax law is working.

It is not yet clear that repatriation is generating additional economic activity, though conservative economists say the dividend payments will lead to more investment over time, which should generate greater tax revenue in the longer run.

“This tax law is working, in the sense that now shareholders have access to their cash,” Clausing said, “but whether that translates to investment is a much different question.”