Donald Trump is running for president again, and voters will be hearing a lot about the 2017 tax cuts he signed into law. Trump, for one, will brag about the economic magic brought about by the tax cuts that supposedly pumped prosperity everywhere. There’s also the curious fact that the corporate tax cuts were permanent, but the personal tax cuts were temporary. Republicans are already campaigning to extend those individual tax cuts before they expire at the end of 2025.
Recall that the Tax Cuts and Jobs Act of 2017 (TCJA), as it was known, simplified tax filing for many families and lowered the tax rates most filers pay. He also cut the corporate income tax rate from 35% to 21% and cut other business taxes. The law “cost” about $1.9 trillion, meaning that’s the amount budget analysts estimated it would add to the national debt over 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 broke out in 2020 is distorting the economy in many ways that make it difficult to measure the long-term impact of the TCJA. But there is plenty of evidence from 2018 and 2019, the first two years the law was in effect, to draw some conclusions. Here are some false claims to watch out for.
The TCJA paid for itself. It almost certainly did not, meaning that the tax savings for individuals and businesses were mostly financed by additional federal borrowing. But the COVID pandemic has muddled that story and given supply-side tax cut advocates little cover for the claim that the TCJA produced an economic windfall.
The best early estimate of the fiscal impact of the tax law was a 2018 Congressional Budget Office (CBO) analysis that projected the tax cuts would reduce federal revenue by $1.9 trillion over a decade. That included $2.3 trillion in lost revenue, mostly from lower personal and business tax collections than otherwise under the new law, and $460 billion in new revenue from a slight boost to growth.
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Tax collections in 2018 and 2019 were even lower than CBO projections. Individual tax receipts were higher than forecast in 2019 and lower in 2020. Corporate tax receipts were lower than forecast in both years. Overall, total revenue from both sources was $65 billion lower for both years. Thus, the tax law slightly underperformed expectations during these two years.
In 2020, tax receipts from personal and corporate taxes were $319 billion lower than previously forecast. But that doesn’t make sense, given the sharp plunge in economic activity caused by the COVID pandemic. In 2021, personal and business tax receipts were $189 billion higher than previously forecast. This is the main piece of evidence that tax cut advocates cite to claim that the Trump tax cuts paid for themselves.
But come on. These claims of a supply-side tax miracle in 2021 completely ignore the sharp rebound from the tax revenue plunge in 2020 and also fail to account for the unprecedented $6 trillion in COVID-related stimulus that Congress passed in 2020 and in 2021. “Tax revenue increased in 2021, and some supporters of the Tax Cuts and Jobs Act of 2017 argue that the big tax cuts in the bill deserve credit,” the Brookings Institution reported earlier this year. “But there’s 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 took effect—two before COVID, one during COVID, and one after COVID—personal and business tax revenues are $195 billion below the CBO estimate for 2018 .The chart below shows tax receipts a little more simply, as a percentage of GDP. In total, the Trump tax cuts are set to cost more, not less, than the CBO’s 2018 estimate of $1.9 trillion in additional federal debt. This means that it is mostly just a transfer of money from future taxpayers to current ones – and no miracle.
Tax cuts boosted growth. You certainly won’t find evidence of this in any conventional financial data. The first chart below shows inflation-adjusted real GDP growth on a quarterly basis since 2015. There was an increase in 2018, the first year the Trump tax cuts were in effect. But in 2019, growth slowed again. Pfft. The same trend is evident in the next chart, which shows business investment: a decline in 2018 followed by a softening in 2019. The COVID distortions mix up the data for 2020 and 2021, so you can skip the numbers for those years to justify almost any outlandish hypothesis. But if there wasn’t a tax cut-grow-boom before 2020, it wouldn’t happen.
Tax cuts boosted employment. Job growth has been strong during the Trump presidency, but again, there is no evidence that the tax cuts have had any effect on jobs. The trend in total employment has not changed since the tax cuts took effect. Manufacturing employment, a particular target for Trump, did grow a bit in 2018, but gradually declined in 2019 and actually fell toward the end of that year, possibly because Trump’s tariffs on billions of dollars of imports increased the cost of parts for Americans manufacturers. production.
Overall, the Trump tax cuts allow businesses and individuals to keep more of their income by reducing federal tax revenue and borrowing to make up the difference. In general, this is not good tax policy. Taxes should be as low as possible, while most government activity will be financed. A modest amount of borrowing is fine, but Washington borrowed too much before the Trump tax cuts and borrowed even more afterward.
That doesn’t mean the Trump tax cuts will be easy to undo. The business tax cuts are permanent, meaning it would take a majority of Congress to vote to repeal them. President Biden is willing to raise business taxes, but could only make 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 any increases 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 return to 2017 levels, a de facto tax increase for many Americans. That probably won’t happen. Congress will likely extend these tax cuts for most workers. But letting taxes go up on high-income Americans certainly makes sense, especially if Democrats control Congress after 2024. High earners benefited the most from Trump’s tax hikes — and they didn’t need tax relief in the first place. At least it will be a few years before the taxman returns.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjewman
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