3 myths about the Trump tax cuts
Donald Trump is running for president again, and voters are going to hear a lot about the 2017 tax cuts he signed into law. Trump, for one, will brag about the economic magic borne of tax cuts that supposedly pumped prosperity everywhere. There’s also the curious 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 2017 Tax Cuts and Jobs Act (TCJA), as it was known, simplified tax filing for many families and lowered the tax rates most filers pay. It also lowered the corporate income tax rate from 35% to 21% and cut other business taxes. The law “cost” about $1.9 trillion, which means that’s the amount budget analysts estimated it would add to the national debt during the decade after it went into effect.
The law has generated many competing claims about whether it boosted growth, employment, or incomes, and whether it was a net positive or negative for the economy. The COVID pandemic that erupted in 2020 distorted the economy in many ways that make it hard to gauge the longer-term effect of the TCJA. But there’s plenty of data from 2018 and 2019, the first two years the law was in effect, to draw some conclusions. Here are some bogus claims to watch out for.
The TCJA paid for itself. It almost certainly didn’t, which means tax savings for individuals and businesses were mostly financed by additional federal borrowing. But the COVID pandemic muddled this story and gave supply-side tax-cut advocates a bit of cover for claiming the TCJA produced an economic windfall.
The best early estimate for the fiscal effects of the tax law was a 2018 Congressional Budget Office (CBO) analysis that forecast the tax cuts would reduce federal revenue by $1.9 trillion over a decade. That included $2.3 trillion in foregone revenue, mostly from individual and corporate tax receipts that would be lower than otherwise under the new law, and $460 billion in new revenue from a slight boost to growth.
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Tax receipts in 2018 and 2019 turned out even lower than the CBO forecast. Individual tax receipts were higher than the forecast in 2019 and lower in 2020. Corporate tax receipts were lower than the forecast in both years. Combined, total revenue from both sources was lower by $65 billion for both years. So the tax law slightly underperformed expectations during those two years.
In 2020, individual and corporate tax receipts were $319 billion lower than the earlier forecast. But that’s not meaningful, because of the sharp plunge in economic activity caused by the COVID pandemic. In 2021, individual and corporate tax receipts were $189 billion higher than the earlier forecast. That's the principal piece of evidence tax cut advocates cite to claim the Trump tax cuts paid for themselves.
But come on. Those claims about a supply-side tax miracle in 2021 completely ignore the snapback from the 2020 plunge in tax revenue and also don't account for the unprecedented $6 trillion in COVID-related stimulus Congress passed in 2020 and 2021. “Tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act argue that the big tax reductions in the bill deserve the credit,” the Brookings Institution reported earlier this year. “But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation.”
Including all four years since the tax cuts went into effect—two before COVID, one in the midst of 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 a bit more simply, as a percentage of GDP. On the whole, the Trump 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’re mostly just a transfer of money from future taxpayers to present ones — and no miracle at all.
The tax cuts boosted growth. You sure won’t find evidence of this in any conventional 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 the Trump tax cuts were in effect. But in 2019, growth dipped back again. Pffft. The same trend is evident in the next chart, showing business investment: a blip in 2018 followed by a softening in 2019. COVID distortions mess up the data for 2020 and 2021, so you could fudge the numbers for those years to justify just about any wacky hypothesis. But if there wasn’t a tax-cut-growth-boom before 2020, it wasn’t going to happen.
The tax cuts boosted employment. Job growth was strong during Trump’s presidency, but again, there’s no evidence the tax cuts had any effect on jobs at all. The trend in total employment shows no change after the tax cuts went into effect. Manufacturing employment, a particular target for Trump, did rise a bit in 2018, but it flatlined in 2019 and actually dipped toward the end of that year, probably because Trump’s tariffs on billions of dollars of imports were raising component costs for U.S. manufacturers and dinging production.
On net, the Trump tax cuts let businesses and individuals keep more of their income by lowering federal tax revenue and borrowing to make up the difference. In general, that’s not good tax policy. Taxes should be as low as possible while financing most of the government’s activity. A modest amount of borrowing is okay, but Washington borrowed too much before the Trump tax cuts and it borrowed even more afterward.
That doesn’t mean the Trump tax cuts will be easy to repeal. The business tax cuts are permanent, which means it would take Congressional majorities to vote to undo them. President Biden is willing to raise business taxes, but he could only get very small changes through a Democratically controlled Congress in 2021 and 2022. The Republicans who will control the House during the next two years are likely to block any hikes in business taxes.
The individual tax cuts are more of an open question because they’re due 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 most likely extend those tax cuts for most workers. But letting taxes rise for high-earning Americans is certainly plausible, especially if Democrats control Congress after 2024. High earners benefited the most from the Trump tax hikes — and didn’t really need tax relief in the first place. At least it will be a few years before the tax man returneth.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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