Few topics are more misunderstood in the modern economic discourse than taxes—what they are, who pays them, and what happens when they’re cut. Somewhere between political spin and spreadsheet modeling, we lost the plot.
Let’s get one thing straight: tax cuts don’t reduce federal revenue in absolute terms. What they reduce is projected revenue—a forecast based on current policy, assuming nothing else changes. This is what budget wonks call "scoring," and it’s a game of hypotheticals, not reality.
Here’s where most people get tripped up: our tax system is highly progressive and deeply intertwined with the financialized economy. That means the real driver of tax revenue isn’t the rate—it’s the velocity of money.
When dollars churn rapidly through the economy—moving from consumers to businesses to workers and back again—the tax base expands, and revenues rise. This happens regardless of whether the top marginal tax rate is 37%, 39.6%, or somewhere in between. It’s not just about how much is taxed—it’s about how often money changes hands.
The 2017 Tax Cuts and Jobs Act (TCJA) is a perfect case study. Critics predicted fiscal doom. Instead, we’ve seen record-high tax collections—both in total and on a per capita basis. The law didn’t tank revenue; it altered its growth trajectory, temporarily, while the economy recalibrated and capital reallocated.
The hard truth? The federal government is collecting more tax dollars today than at any point in history. Not despite tax cuts—but, in part, because of the economic momentum they helped unleash.
If you're only looking at tax rates and ignoring the velocity of money, you're playing checkers in a chess match.
Important points all. And as further evidence that relative marginal rates are pretty well meaningless (in terms of revenue), they’ve moved all over the map and revenue as a percent of gdp doesn’t change much at all in response. ~17% of GDP holds pretty steady.
I think for me the big economic impact of the question is while the money is ostensibly staying in the private sector, the government is, in reality, still allocating the resources / shifting the incentives to the tune of an EXTRA 7% of gdp beyond what the outlays side of the budget would seem to imply. Meaning on some level, the governments footprint in the economy remains much much larger than we tend to think.
We focus rightfully on Fed MBS purchases, for instance, but rarely ask where might home affordability might be absent decades of the interest deduction subsidy.
Maybe these altered incentives are good in cases. Maybe in cases they are bad, but it’s the quantum of it all I think needs more attention. Because it’s absolutely massive and it’s opaque.
But that’s the whole point, isn’t it? Obfuscation isn’t a bug — it’s a feature. The more opaque and convoluted the system, the harder it becomes to question, challenge, or reform. Complexity is the moat, and confusion is the castle wall.
100%. Evidence the fact that Paul Ryan wanted to reform it as both the Chairman of W&M and as Speaker. And not for nothing, when he was W&M chair, he was simultaneously chair of the budget committee. So about as well placed as once could be. His successor Kevin Brady also wanted to reform it. Both of them smart, capable, and patriotic guys to the core.
And while I don’t know this to be true, have it on pretty good authority that Trump himself wanted major reform coming into his first term, particularly as it related to the repatriation of offshore earnings .
But by the time he had his feet under him, the lobbyists had already killed any momentum toward that goal. It was over before it started.
Having been on the receiving end of how they operate, the lobbyists truly don’t waste any time. They don’t react. They preempt. They know exactly what they want to get done and more importantly know exactly how to do it.
Perhaps more important still, they’re already chilling inside the castle walls having coffee months before you can even try to make a plan, let alone muster the forces to carry it out. They know where every weak point is before you can start figuring it out.
I really enjoyed this Harrison. Lucid and vey well written. My daughter was a staffer for Rodney Frelinghuysen for several years before he packed it in. There are no easy answers, sir. The abyss is too deep now. Imo Trump needs to raise the limit to 40T so he has some running room. The horse is long gone fom the barn. The only reasonable course is to build a bigger barn which means votes that he cannot get without a big beautiful bucket of grease.
No kidding? An appropriator of the old school! It’s truly a great place to work for a young person. At least it certainly used to be.
And sadly, I agree with your basic premise. The irony (and I don’t know this for sure, but have it on pretty good authority) is that Trump wanted to clean a lot of this stuff up when he was coming into office the first time. Most especially repatriation of capital from abroad. But he was still getting his feet under him and as noted, the lobbyists don’t exactly sit around and wait for you to get it figured out. Why alter tomorrow that which you could alter today? Given months to work it behind the scenes, it’s over before the first markup is scheduled.
Few topics are more misunderstood in the modern economic discourse than taxes—what they are, who pays them, and what happens when they’re cut. Somewhere between political spin and spreadsheet modeling, we lost the plot.
Let’s get one thing straight: tax cuts don’t reduce federal revenue in absolute terms. What they reduce is projected revenue—a forecast based on current policy, assuming nothing else changes. This is what budget wonks call "scoring," and it’s a game of hypotheticals, not reality.
Here’s where most people get tripped up: our tax system is highly progressive and deeply intertwined with the financialized economy. That means the real driver of tax revenue isn’t the rate—it’s the velocity of money.
When dollars churn rapidly through the economy—moving from consumers to businesses to workers and back again—the tax base expands, and revenues rise. This happens regardless of whether the top marginal tax rate is 37%, 39.6%, or somewhere in between. It’s not just about how much is taxed—it’s about how often money changes hands.
The 2017 Tax Cuts and Jobs Act (TCJA) is a perfect case study. Critics predicted fiscal doom. Instead, we’ve seen record-high tax collections—both in total and on a per capita basis. The law didn’t tank revenue; it altered its growth trajectory, temporarily, while the economy recalibrated and capital reallocated.
The hard truth? The federal government is collecting more tax dollars today than at any point in history. Not despite tax cuts—but, in part, because of the economic momentum they helped unleash.
If you're only looking at tax rates and ignoring the velocity of money, you're playing checkers in a chess match.
https://www.statista.com/statistics/200405/receipts-of-the-us-government-since-fiscal-year-2000/
Important points all. And as further evidence that relative marginal rates are pretty well meaningless (in terms of revenue), they’ve moved all over the map and revenue as a percent of gdp doesn’t change much at all in response. ~17% of GDP holds pretty steady.
I think for me the big economic impact of the question is while the money is ostensibly staying in the private sector, the government is, in reality, still allocating the resources / shifting the incentives to the tune of an EXTRA 7% of gdp beyond what the outlays side of the budget would seem to imply. Meaning on some level, the governments footprint in the economy remains much much larger than we tend to think.
We focus rightfully on Fed MBS purchases, for instance, but rarely ask where might home affordability might be absent decades of the interest deduction subsidy.
Maybe these altered incentives are good in cases. Maybe in cases they are bad, but it’s the quantum of it all I think needs more attention. Because it’s absolutely massive and it’s opaque.
But that’s the whole point, isn’t it? Obfuscation isn’t a bug — it’s a feature. The more opaque and convoluted the system, the harder it becomes to question, challenge, or reform. Complexity is the moat, and confusion is the castle wall.
100%. Evidence the fact that Paul Ryan wanted to reform it as both the Chairman of W&M and as Speaker. And not for nothing, when he was W&M chair, he was simultaneously chair of the budget committee. So about as well placed as once could be. His successor Kevin Brady also wanted to reform it. Both of them smart, capable, and patriotic guys to the core.
And while I don’t know this to be true, have it on pretty good authority that Trump himself wanted major reform coming into his first term, particularly as it related to the repatriation of offshore earnings .
But by the time he had his feet under him, the lobbyists had already killed any momentum toward that goal. It was over before it started.
Having been on the receiving end of how they operate, the lobbyists truly don’t waste any time. They don’t react. They preempt. They know exactly what they want to get done and more importantly know exactly how to do it.
Perhaps more important still, they’re already chilling inside the castle walls having coffee months before you can even try to make a plan, let alone muster the forces to carry it out. They know where every weak point is before you can start figuring it out.
I really enjoyed this Harrison. Lucid and vey well written. My daughter was a staffer for Rodney Frelinghuysen for several years before he packed it in. There are no easy answers, sir. The abyss is too deep now. Imo Trump needs to raise the limit to 40T so he has some running room. The horse is long gone fom the barn. The only reasonable course is to build a bigger barn which means votes that he cannot get without a big beautiful bucket of grease.
No kidding? An appropriator of the old school! It’s truly a great place to work for a young person. At least it certainly used to be.
And sadly, I agree with your basic premise. The irony (and I don’t know this for sure, but have it on pretty good authority) is that Trump wanted to clean a lot of this stuff up when he was coming into office the first time. Most especially repatriation of capital from abroad. But he was still getting his feet under him and as noted, the lobbyists don’t exactly sit around and wait for you to get it figured out. Why alter tomorrow that which you could alter today? Given months to work it behind the scenes, it’s over before the first markup is scheduled.