Opinion: Trump tax cut was neither bane nor boon
President Donald Trump’s main legislative accomplishment as he runs for re-election is the Tax Cut and Jobs Act that he signed at the end of his first year in office. It is the linchpin of the Republicans’ case that their economic policies have worked. Trump’s Democratic opponent, former Vice President Joe Biden, has said that he will repeal the tax cut if he wins, or at least repeal some of it. To the (very limited) extent this campaign will be a debate about public policy, the tax bill will be one of its main subjects.
The bill was complex and unwieldy legislation with many moving parts. Many people saw some of its provisions raise their tax payments while reducing those of others. Perhaps it is not surprising, then, that neither side’s talking points about the law really hold up to scrutiny.
The Democrats’ chief charge has always been that it was a huge giveaway to the rich. “All of it went to folks at the top and corporations,” Biden said in 2019. Tax experts have been less hyperbolic but made a similar point. The Tax Policy Center, for example, estimated that more than 20% of the bill’s tax cuts went to the highest-earning 1% of Americans.
That statistic looks less shocking, however, when you consider that these top earners pay a large share of federal taxes, both because they make a large share of the nation’s income and because federal taxes are progressive. The law left them paying roughly the same share of all federal taxes as before. The Joint Committee on Taxation concluded that households making more than $1 million in 2021 would have paid 19.2% of all federal taxes if the law hadn’t passed, but will pay 19.6% since it did. Some taxpayers in each income category got hit with net tax increases — there’s that complexity again — but overall, each group got roughly a proportional cut in average tax rates.
Republicans, on the other hand, exaggerate how much the tax bill spurred economic growth. The U.S. had a relatively strong economy between the time it was enacted and the coming of the coronavirus pandemic. But the pre-tax-law trends look pretty similar to the post-law ones. (Of course, the tax law wasn’t the only thing that changed during this period. The law might have helped the economy more if not for Trump’s trade wars.)
The main economic argument for the bill was that it cut tax rates on business investment and so encouraged more of it, and there is some evidence that the law had a modest effect along these lines. A study by the Federal Reserve Bank of Dallas found a positive, but small, effect on employment in 2018. If that’s right, the law accounted for about 6,500 of the 2.7 million jobs created that year.
The effect of the tax law on the deficit is easier to determine: It increased it. Republican politicians often say that tax cuts can increase economic growth so much that they cause revenue to rise. But even the most optimistic projections of the economic effects of the tax law found that it would bring revenues down. The Congressional Budget Office calculated that between lower revenue and higher interest payments, the law would increase deficits by $1.85 trillion over 11 years. Federal revenue actually fell in its first year, after adjusting for inflation.
Congress followed up the tax cut with major increases to federal spending. A bipartisan budget agreement in 2019 raised spending (including on interest payments) by $1.7 trillion over 10 years. Together, these policy changes swelled the deficit from $585 billion in 2016 to $984 billion in 2019. This indulgence took place during a period of economic expansion, when the economy did not need any stimulation from deficits and moving toward a balanced budget would have been relatively painless.
Concern about deficits has been declining in both parties, which believe, probably correctly, that voters do not really care about them. Nobody puts a “fiscal responsibility” bumper sticker on his car. So we’re not hearing a lot from the presidential campaigns about this indisputable effect of the Trump tax cut. And since much of what Biden and Trump are saying about the tax cut is exaggerated to the point of falsity, maybe it’s for the best that the campaign isn’t centered on government policy after all.
Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at the National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.