Just Taxes Blog by ITEP

Congressional Research Service Calls Three Strikes on the Trump Tax Cuts

Congressional Research Service Calls Three Strikes on the Trump Tax Cuts

May 30, 2019

Matthew Gardner
Matthew Gardner
Senior Fellow

Those who support President Trump’s 2017 tax cuts continue to make three dubious economic policy claims. One is that the so-called Tax Cuts and Jobs Act (TCJA) grew the U.S. economy; second is this growth means the tax bill will eventually “pay for itself,” to use the supply-side lingo; and third is that middle-class families are the main beneficiaries of these tax cuts. A new report from the non-partisan Congressional Research Service (CRS) debunks each of these far-fetched claims.

Let’s start with the TCJA’s effect on the U.S. economy. The economy grew by 2.9 percent in 2018, the first year after the passage of the new law. Sounds good except, as the CRS notes, the Congressional Budget Office projected a similar growth rate long before the passage of the 2017 tax cut. Moreover, the CRS finds, the 2.9 percent growth rate was firmly “in line with the trend in growth” over the previous half-decade. This means that the economy’s growth rate in 2018 was essentially what it would have been without tax cuts.

For many people, a more tangible measure of the tax cuts’ effect is what happened to wages. If 2.9 percent economic growth is nothing special, what CRS finds on the wage front is even less special. Inflation-adjusted wages grew by 2.0 percent in 2018, far less than the growth in the economy. And wage growth for “production and nonsupervisory workers” grew by 1.2 percent. The CRS’s takeaway: “There is no indication of a surge in wages in 2018 either compared to history or relative to GDP growth.”

These twin policy failures come with a much bigger price tag than advertised. Proponents of the tax law relied on disproved trickle-down economic theories to relentlessly argue that tax cuts would pay for themselves by spurring economic growth—a claim parroted as recently as March by Trump economic adviser Larry Kudlow. But, thanks to plummeting corporate and personal income tax revenues, the Trump plan is doing nothing of the kind. To be fair, CRS finds economic growth generated by the tax cuts paid for 5 percent of their costs. But that hardly lives up to grand promises of super-charged economic growth that will allow the tax cuts to pay for themselves.

If the economic growth, wage boost, and supply-side effects of the Trump tax cut turned out to be falsehoods, the architects of the plan can take comfort in one thing: the CRS finds the tax law was phenomenally successful in cutting taxes for big, profitable corporations. From 2017 to 2018, the estimated average corporate tax rate fell from 23.4 percent to 12.1 percent. This means that “the ratio of effective to statutory tax rate dropped following the tax revision. The statutory tax rate dropped by 40 percent, but the effective rate dropped by 48 percent.” This is a damning indictment of any claim that the Trump plan achieved corporate tax “reform.”  If the effective corporate tax rate fell faster than the statutory rate, this suggests that the new tax law opened more tax loopholes than it closed.

This is hardly the first time that judgment has been passed on the TCJA’s economic effects. In fact, a Treasury Department report earlier this year found that federal corporate tax collections (that is, the revenue collected from corporations to fund the federal government) declined by 31 percent from 2017 to 2018. This new report is the most comprehensive assessment yet undertaken by the CRS, which has an unimpeachable reputation as an impartial arbiter of policy disputes. So, when it says that the TCJA doesn’t appear to have grown wages or the economy and has made our long-term budget deficits even worse, it’s a judgment that will last—and an evaluation that should constrain outlandish claims about the merits of the Trump tax cuts.