As policymakers begin to address the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025, a key question is the net budget impact of such legislation. This discussion includes elements from three separate considerations:

• The real need to address the federal government’s unsustainable budget outlook;

• The possibility of implementing the reforms within the framework of the reconciliation process, which would exclude the emergence of deficits beyond the 10-year budget period; and

• The general belief that tax cuts “finance themselves.”

Let’s go through these in reverse order. First, not all tax policy is growth-enhancing. The punitive, redistributive taxation that is so popular at the moment will not generate growth and therefore cannot “pay for itself” in any way. It is the senseless act of making everyone poorer in order to make the rich poorer. No thanks.

The problem with a growth-promoting tax policy is not whether it finances itself. It does. The question is: How long does it take to finance itself? To get a sense of this issue, consider the table (below). The rows represent tax cuts as a percentage of gross domestic product (GDP) in 0.2 percent increments up to a maximum of 1.6 percent of GDP. (Think of this as based on a rough base of 18 percent of GDP.) For reference, the first column shows the rough static revenue loss over 10 years from the Congressional Budget Office’s current baseline budget projections.

Each column shows the boost in growth from the tax cut, and the entries indicate the number of years it takes for revenues to return to their pre-tax cut levels after the tax cut. So, for example, if a tax cut of 1.2 percent of GDP leads to a 0.3 percentage point increase in trend growth – which is really good – then it would take 23 years for revenues to return to their baseline level.

Looking at the table shows the theoretically While there is a chance that revenues will recover to baseline levels within 10 years, there are no examples of tax cuts of this magnitude having such a large impact on growth. But have these tax cut unicorns “paid for themselves”? Not really. In all years leading up to the break-even year, revenues are below the previous baseline. Tax cuts Really have paid off when the subsequent higher revenues compensate for these deficits.

For a good tax policy it is only a matter of time.

But that only happens if the tax reform stays in place. If it passes by ballot, it means that no more deficits can be projected after the 10-year budget window. (This is precisely why so many aspects of the TCJA are expiring next year.) The solution is not to undo a good growth-enhancing tax policy with a grab bag of (likely growth-inhibiting) revenue streams. The solution is mandatory spending reforms that slow spending growth and eliminate deficits. (See, for example, the AAF’s plan Here.)

This brings us to the federal budget outlook. The combination of growth-enhancing tax reform and mandatory spending reforms is just the right recipe to get debt under control. As Eakinomics has pointed out in the past, there is no solution to the debt outlook without Social Security and Medicare reforms. And there is no better complement to spending reforms than growth-enhancing tax reform. And to bring things full circle, there is no way to finance growth-enhancing tax reform itself unless it stays in place long enough, which requires spending reforms.