Fiscal Policy Research · Part 2 of 2

Testing the Big Claims About Taxes and Inflation

What actually holds up when you check the numbers.

Part 1 of this project laid out the facts: where the law comes from, what the current tax code says, and where the government's money comes from and goes. This document takes the claims people make constantly — in campaign ads, on cable news, in arguments with your neighbor — and tests them against those facts.

Claim 1: "Cutting taxes pays for itself because it grows the economy"

The reasonable version: if people keep more of what they earn, they work, save, and invest more — growing the economy and clawing back some of the "lost" revenue. This isn't fringe; every serious forecaster, including CBO, builds some of this effect into its models. The question was never whether it happens — it's how much.

Every estimate — even from groups generally sympathetic to tax cuts — landed well under 20%. Once the extra interest on the added debt is factored in, the true cost to the deficit can end up higher than a "zero growth effect" estimate, because more borrowing pushes up interest rates.

Real-world example — Kansas, 2012–2017: Kansas cut taxes sharply, betting on this same growth effect. Job growth came in at less than half the national rate; budget shortfalls got severe enough that the state Supreme Court ruled resulting school-funding cuts unconstitutional. In 2017 the legislature — controlled by the same party that passed the cuts — reversed most of them, overriding the governor's veto by a two-thirds majority.

Some growth offset is real. "Tax cuts pay for themselves" as usually said out loud isn't supported by anyone's numbers, including tax-cut supporters' own.

Claim 2: "We can cut wasteful spending to pay for tax cuts without adding to the deficit"

The reasonable version: the government spends $7.4 trillion a year — surely enough could be trimmed to offset tax relief dollar-for-dollar.

About three-quarters of the federal budget is essentially on autopilot: Social Security, Medicare, Medicaid, and interest on debt already owed — not seriously "on the table" in any actual proposal. That leaves about a quarter, split roughly evenly between the military and everything else government does.

The 2025 tax law cut revenue by an estimated $4.4–5.2 trillion over ten years. Covering that entirely through spending cuts — without touching Social Security, Medicare, Medicaid, defense, or interest — would mean cutting the entire remaining non-defense government to zero, every year, for a decade. No FBI. No national parks. No federal medical research. And it would still barely be enough.

There isn't enough spending outside Social Security, Medicare, Medicaid, defense, and interest to pay for tax cuts at this scale. Any plan that doesn't name which of those five it's cutting hasn't done the math yet.

Claim 3: "We could raise more money just by making sure people pay taxes they already owe"

The reasonable version: collect the $606 billion a year already legally owed but unpaid, rather than raising anyone's rate.

This is the one claim with a real, live example running in both directions. In 2022, Congress gave the IRS $80 billion over ten years for enforcement; CBO projected $204 billion in extra revenue as a result — real money back for every dollar spent.

Since then, over $53 billion of that funding has been clawed back and IRS staffing has dropped by about 28,000 people, toward its smallest size since the 1960s. CBO scored the cuts too: a recent $11.7 billion cut is projected to cost $38.6 billion in lost revenue over the following decade — the same multiplier, running in reverse. One independent estimate puts the total cost of the recent cuts at $598–861 billion in lost revenue through 2035.

Better enforcement funding really does pay for itself several times over, and cutting it really does cost more than it saves. It's worth doing. It isn't, by itself, a way to pay for large tax cuts.

Claim 4: "We can beat inflation by producing more instead of raising interest rates"

The reasonable version: if prices are high because supply is short, make more of the thing — a less painful path than raising rates. This lines up with where inflation actually is right now (see Part 1): almost all of the excess above the Fed's target is energy, not a broad problem.

Energy — happening in real time: U.S. oil production hit an all-time record of 13.6 million barrels a day in 2026; natural gas also hit record highs. At the same time, gas prices rose about 35% over the year, driven by a shipping disruption near the Strait of Hormuz. Record domestic production and a major price spike happened simultaneously, because oil is priced on one global market — even the largest producer on the planet can't fully shield its own citizens from a shock caused somewhere else.

Housing works differently, but slowly: zoning reform really can lower prices — estimates range from a few percent up to 15–27% under substantial reform — but studies of real cities found effects were small in the first few years and only became significant six to twelve years later.

Energy doesn't help because prices are set globally, not locally. Housing probably helps eventually, but "eventually" means most of a decade. A weaker claim survives: building more homes is good long-term policy — it just isn't a substitute for what the Fed does with interest rates right now.

Claim 5: "Combining tax cuts with spending cuts can sometimes make both inflation and the deficit worse"

This claim asks something none of the first four do alone: not whether one policy works, but whether pairing two policies together can produce a worse result than either would alone. We tested it against the same real law from three separate angles.

• Angle one. The 2025 tax law paired real tax cuts with real spending cuts, and the combination still made the deficit worse by $3.0–4.7 trillion — a result invisible from either piece alone.
• Angle two. The same period that cut taxes also cut the one part of the budget that reliably pays for itself — tax enforcement. Instead of a working tool helping cover the cost, the two moves ran in opposite directions at once.
• Angle three. The Fed itself said the economy is growing at a solid pace with strong investment — not one needing a boost. Adding trillions in deficit-financed tax cuts to an economy already running near full speed pushes toward inflation, part of why the Fed raised rates the same day this research began. Fiscal policy pushing one way while the Fed pushes the other means rates end up higher, and stay higher longer, than they would otherwise — raising the cost of every mortgage and business loan in the country.

Tax cuts and spending cuts aren't automatically bad on their own — claims 1 and 2 already showed each has a real, if limited, case. It's that this specific combination — cuts without enough offsetting savings, defunding the one tool that reliably pays for itself, timed to hit an economy already running hot — stacks several disadvantages in the same direction at once. Each piece was a separate, identifiable decision, meaning each could plausibly have gone differently.

Putting it all together

None of this tells you what your tax rate should be, or what the government should spend money on — those are value judgments this project isn't in the business of making. What it does tell you is which arguments hold up when you actually check them against the numbers, and which ones sound reasonable right up until you do.

This research is presented for public understanding and does not constitute financial, legal, or tax advice. All figures are sourced to BLS, CBO, IRS, GAO, and independent nonpartisan modelers current as of the date noted in Part 1.