Donald Trump is running for president again, and voters have heard a lot about the 2017 tax cuts he signed into law. Trump, in any case, will be bragging about the economic magic resulting from tax cuts that have made prosperity everywhere. Also curious is the fact that the tax cuts for businesses were permanent, but the tax cuts for individuals were temporary. Republicans are already campaigning to extend those individual tax cuts before they expire at the end of 2025.
As a reminder, the Tax Cuts and Jobs Act of 2017 (TCJA), as it was called, simplified tax filing for many households and reduced the tax rates most filers pay. He also reduced the corporate income tax rate from 35% to 21% and cut other business taxes. The law “costs” about $1.9 trillion, meaning that’s how much budget analysts estimate it would add to the national debt in the decade after it goes into effect.
The law has generated many competing claims as to whether it has contributed to growth, employment or incomes, and whether it has been net positive or negative for the economy. The COVID pandemic that erupted in 2020 distorted the economy in many ways, making it difficult to measure the long-term effect of the TCJA. But there is enough data from 2018 and 2019, the first two years that the law was in force, to draw some conclusions. Here are some false claims to watch out for.
The TCJA paid for itself. It certainly wasn’t, meaning tax savings for individuals and businesses were largely financed by additional federal borrowing. But the COVID pandemic has confounded this narrative and supply-side tax cut advocates have provided little cover for their claim that the TCJA produced an economic windfall.
The best early estimate of the tax law’s fiscal effects was a 2018 Congressional Budget Office (CBO) analysis that predicted the tax cuts would reduce federal revenue by $1.9 trillion over a decade. That included $2.3 trillion in foregone revenue, mostly from lower individual and corporate tax receipts than otherwise under the new law, and $460 billion in new revenue from a modest increase in growth.
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Tax receipts in 2018 and 2019 were even lower than CBO’s forecast. Individual tax receipts were higher than forecast in 2019 and lower in 2020. Corporate tax receipts were lower than forecast in both years. Combined, total revenue from both sources was $65 billion lower for the two years. So the tax bill was only slightly lower than expected during those two years.
In 2020, individual and corporate tax receipts were $319 billion lower than previously predicted. But that makes no sense, given the sharp drop in economic activity caused by the COVID pandemic. In 2021, individual and corporate tax receipts were $189 billion higher than previously predicted. That’s the main piece of evidence tax cut advocates cite to claim Trump’s tax cuts paid for themselves.
But come on. Those claims of a supply-side tax miracle in 2021 completely ignore the snapback from the 2020 drop in tax revenue and also fail to account for the unprecedented $6 trillion in COVID-related stimulus passed by Congress in 2020 and 2021. “There was a boom in tax revenue. 2021 and some supporters of the Tax Cuts and Jobs Act of 2017 argue that the big tax cuts in the bill deserve the credit,” the Brookings Institution reported earlier this year. “But there’s a much better explanation: Last year strong economic growth, high inflation, and pandemic-related relief legislation.”
Including all four years since the tax cuts took effect—two before COVID, one amid COVID, and one after COVID—individual and corporate tax revenue is $195 billion below the CBO’s 2018 estimate. The chart below shows tax receipts in a slightly simpler way, as a percentage of GDP. Overall, Trump’s tax cuts are on track to cost more, not less, than the CBO’s 2018 estimate of $1.9 trillion in additional federal debt. That means they are mostly just a transfer of money from future taxpayers to current ones — and no miracle at all.
The tax cuts contributed to the growth. You certainly won’t find evidence of this in any standard economic data. The first chart below shows real GDP growth, adjusted for inflation, on a quarterly basis since 2015. There was an uptick in 2018, the first year Trump’s tax cuts were in effect. But in 2019, growth slowed again. Pfft. The same trend can be seen in the next chart, which shows business investment: a blip in 2018 followed by a decline in 2019. COVID distortion messes up the data for 2020 and 2021, so you could flush the numbers for those years to protect a bit. wacky hypothesis. But if there wasn’t a tax cut growth spurt before 2020, it wasn’t going to happen.
The tax cuts boosted employment. There has been strong job growth during the Trump presidency, but again, there is no evidence that the tax cuts have had any impact on jobs. The trend in total employment shows no change after the tax cuts took effect. Manufacturing employment, a particular target for Trump, rose slightly in 2018, but declined in 2019 and actually fell toward the end of that year, likely because Trump’s tariffs on billions of dollars in imports were raising costs. components for US manufacturers and wedge. production.
On the net, Trump’s tax cuts allow businesses and individuals to keep more of their income by lowering federal tax revenue and borrowing to make up the difference. In general, that is not good tax policy. Taxes should be as low as possible while financing most government activity. A little borrowing is fine, but Washington borrowed too much before the Trump tax cuts and borrowed even more after.
That doesn’t mean repealing Trump’s tax cuts will be easy. The business tax cuts are permanent, meaning it would take a majority of Congress to vote to undo them. President Biden is willing to raise business taxes, but could only get very small changes through a Democratic-controlled Congress in 2021 and 2022. Republicans who will control the House over the next two years are likely to block it. on any increase in business taxes.
The individual tax cuts are more of an open question because they are set to expire at the end of 2025. If Congress does nothing, tax rates will go back to 2017 levels, a de facto tax hike for many Americans. That probably won’t happen; Congress will likely extend those tax cuts to most workers. But it’s certainly plausible to let taxes go up for high-earning Americans, especially if Democrats control Congress after 2024. The high earners have benefited the most from Trump’s tax hikes — and tax relief has not they need in the first place. At least it will be a few years before the tax man returns.
He is a senior columnist for Rick Newman Yahoo Finance. Follow him on Twitter at @rickjnewman
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