Trump Tax Cut Redux
Out of the frying pan, into the fire?
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the
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“ Most provisions of the 2017 Tax Cuts and Jobs Act expire at the end of 2025. Congress must act before that sunset date, to ensure that our tax code will remain the most competitive in the world.
That 2017 tax act was a pivotal moment in tax policy.
The 2017 reform allowed businesses to write off more of the cost of new equipment, machinery, software and buildings. It featured a competitive international tax rate.
The 2017 tax reform worked. Year-over-year growth in real gross domestic product accelerated from 2.2% at the end of 2016 to as high as 3.3%. Real nonresidential fixed investment grew 3.3% a year before tax reform but accelerated to 7.5% afterward. The labor market ran hot, and real wages were on the rise.
—Kevin Brady and Douglas Holtz-Eakin, “Expiring 2017 Trump Tax Cuts Create a Chance for Reform,” Wall Street Journal, April 11, 2024.
The recent Wall Street Journal column written by Kevin Brady and Douglas Holtz-Eakin, two former Republican economic advisors, reads like they are auditioning for a job in the next Trump administration. Unable to bring themselves to embrace Trump’s prevarication that he oversaw “the greatest economy in the history of our country,” they settled for shilling for the renewal of Trump’s 2017 Tax Cuts and Jobs Act.
Brady and Holtz-Eakin do real violence to the truth about the effectiveness of the former president’s tax cuts. They present evidence selectively and willfully ignore relevant counterevidence in their campaign to renew the 2017 Trump tax cuts.
The last thing we need is more tax cuts for the rich and large corporations. The 2017 tax cuts made an already-unfair tax code even less fair, and never delivered on the promise that they would accelerate economic growth, income, and tax revenues to pay for the cuts. Instead, rock-bottom corporate taxes did little to nothing to increase investment—tax revenues plummeted, and more profitable corporations went untaxed.
Let’s see what we can do to correct the Trumpian puffery that Brady and Holtz-Eakin pass off as economic truth-telling.
George Washington, They Ain’t
Brady and Holtz-Eakin might not have chopped down a cherry tree like President George Washington supposedly did. But their cherry-picking of the evidence about the Trump tax cuts would have stripped one clean. And they’re not about to confess.
What Brady and Holtz-Eakin refuse to admit is that the 2017 tax cuts did little to help most of us, while showering benefits on the rich, along with corporations and their owners. The 2017 Tax Cuts and Jobs Act decreased individual income taxes, especially for the rich. The top income tax rate fell from 39.6% to 37%. The act also limited the scope of the alternative minimum tax on high-income taxpayers who take advantage of a large number of tax breaks. As a result, just 200,000 taxpayers paid the alternative minimum tax in 2018, down from 5 million taxpayers in 2017. The tax cut also slashed the 35% corporate income tax rate to 21%. And for the next five years, it allowed corporations to expense, or write off immediately, the entire cost of new investments, which reduced their taxable profits and lowered their tax bill. The majority (52.2% in 2018) of the benefits of the tax cuts package went to the richest 10% of taxpayers, according to the Tax Policy Center. What’s more, the Congressional Budget Office estimates that the tax cuts will cost the federal government $1.9 trillion in lost tax revenues from 2018 to 2028.
What Boom?
What Brady and Holtz-Eakin have to say about the macroeconomic benefits of the 2017 tax cuts is highly misleading.
How Low Are Corporate Taxes?
Corporate income tax rates are now lower than any time since World War II. In 1952, the corporate tax rate was 52%, corporate income tax revenues were equal to 5.9% of Gross Domestic Product (GDP), and they accounted for about a third (32%) of federal tax revenues. In 2023, the corporate income tax rate was 21%, corporate income tax revenues were down to 1.6% of GDP, and they made up just 9.5% of federal tax revenues.
The average effective tax rate (how much of their profits corporations pay out in corporate income taxes) for major corporations is far less than the statutory rate of 21%. A recent Institute on Taxation and Economic Policy (ITEP) study found that 296 of the largest profitable corporations paid an average effective tax rate of just 12.8% from 2018 to 2021. And 109 profitable corporations paid zero taxes in at least one year between 2018 and 2022. In 2022 that list included Target, T-Mobile, and Whirlpool.
Brady and Holtz-Eakin call these competitive tax rates. But they are lower than that. A Joint Economic Committee of Congress study found that the effective tax rate of U.S. multinational corporations was just 7.8% in 2018. In that same year, the effective tax rate of the top 10 trading partners with the United States was 18%.
Take their claim that economic growth rates corrected for inflation increased from 2.2% in 2016 to 3.3% in 2019 in the wake of the 2017 tax cuts. Using the growth rate from the end of 2016 in their comparison makes little sense. Congress passed the Tax Cuts and Jobs Act on December 22, 2017, and it didn’t go into effect until January 1, 2018. In the two years immediately after the tax cuts (and before the onset of the Covid-19 pandemic), 2018 and 2019, economic growth averaged 2.65%. But that was barely higher than the 2.6% rate during 2016 and 2017, the two years immediately before the tax cut. Higher government spending and lower interest rates in 2018 and 2019 more than explain the difference in these growth rates.
Nor did the labor market run unusually hot after the 2017 tax cut, as Brady and Holtz-Eakin maintain. Job creation slowed after the tax cuts. Employment increased 1.55% a year in 2016 and 2017, but 1.44% a year in 2018 and 2019. Wage gains, however, did pick up after the tax cuts. For instance, weekly earnings (which includes wages, salaries, overtime pay, commissions, and tips) corrected for inflation increased 1.08% per year in the two years after the 2017 tax cuts from January 2018 to January 2020, more than double the 0.46% rate in the two years immediately before the tax cut. Nonetheless, that higher rate was hardly faster than the 1.01% increase per year in real weekly earnings from January 2013 and January 2017 during the Obama administration.
In a second Wall Street Journal opinion piece published in late May, Brady and Holtz-Eakin present yet more evidence meant to convince the reader that the 2017 tax cuts boosted earnings. They wrote that: “The 9% increase in inflation-adjusted earnings between Jan. 1, 2018, and Dec. 31, 2020, was the fastest growth since the government began publishing data in 1979.” But the spike in real earnings had little or nothing to do with the 2017 tax cuts. What caused it is low-wage workers, who are often unable to carry out their jobs remotely, lost their jobs during the Covid-19 pandemic. With those low-wage workers no longer employed, the average real earnings of those still working increased 5.2% in 2020, the largest annual increase on record. But without the 2020 increase, the growth of real earnings in 2018 and 2019 didn’t come close to setting a record. In those years, real earnings barely grew faster than they had from 2013 to 2017, as reported above.
Brady’s and Holtz-Eakin’s most crucial claim is that cutting corporate income taxes fueled an explosion of business investment in structures, equipment, and intellectual property—what economists call “nonresidential fixed investment.” As they report, real nonresidential fixed investment grew 3.3% a year before the tax cuts but accelerated to 7.5% afterward. But what they fail to report is that the rapid growth of real nonresidential fixed investment only happened in 2018. In 2019, real non- residential fixed investment grew more slowly than it had in 2017 (the year prior to the tax cut) and was expanding at just a 3.2% annual rate at the end of 2019 on the eve of the pandemic.
Several mainstream economic studies were unwilling to attribute the spike in investment in 2018 to Trump’s corporate tax cuts. Jane Gravelle and Donald Marples, economists with the nonpartisan Congressional Research Service, argued that the spike in business investment in the first half of 2018 came too early to be influenced by tax cuts that were passed in late December.
Economists William Gale and Claire Haldeman at the Brookings Institute added two other reasons not to attribute the increase in investment to lower corporate income tax rates. They found that the spike, and then decline, in investment growth in 2018 was “well-explained” by changes in oil and mining-related investments in response to fluctuating oil prices. They also argued that the change in investment is “better explained” by higher spending, or aggregate demand, from increased government and consumer spending than the “supply-side incentives” from cutting corporate tax rates.
Even Emanuel Kopp and his fellow International Monetary Fund (IMF) researchers came to a similar conclusion. While they placed much less weight on the effect of changes in oil prices, they found that “the overriding factor” driving the growth of investment has been “the strength of expected aggregate demand.” They concluded that the “investment growth in 2018 was below predictions based on the historical relation between tax cuts and investment.”
Yet More Evidence Ignored
Stock Buyback Bonanza
Emanuel Kopp and his fellow IMF researchers found that in 2018 Fortune 500 companies spent just 20% of the cash freed up by the 2017 tax cut on capital expenditures and research and development. The rest of it went to stock buybacks, dividends, and other activities. Stock buybacks were by far the biggest of these expenditures. In 2018, corporations listed in the S&P 500 stock index spent $806 billion buying back their own shares, surpassing the previous high of $590 billion in 2007. By 2022, S&P stock buybacks had reached $992.7 billion. And in spring of 2024, Apple purchased a record $110 billion of its own shares.
Funds that go to stock buybacks do not go to investment or corporate operating expenses, including wages. But stock buybacks are a bonanza for stockholders, as well as corporate executives, who typically have stock options as part of their compensation package. By buying back their own shares from existing shareholders, corporations reduce the number of shares of their stock in the market and drive up the price of their stock. Higher stock prices especially benefit the richest 1%, who owned 49.4% of stock by value at the end of 2023, according to the Federal Reserve Board. On top of that, unlike dividends, the increased value of their stock goes untaxed until the stock is sold.
More recent studies provide more compelling evidence of how the 2017 tax cuts failed to live up to their hype. Brady and Holtz-Eakin chose to ignore that evidence as well.
The March 2024 National Bureau of Economic Research (NBER) working paper “Tax Policy and Investment in a Global Economy,” co-authored by economists Gabriel Chodorow-Reich, Matthew Smith, Owen Zidar, and Eric Zwick, used data from 12,000 corporate tax returns from before and after the tax cuts to study the economic effects of the 2017 Tax Cuts and Jobs Act.
The NBER study documented a mix of positive and negative effects from cutting corporate taxes that fell well short of the results promised by the Trump administration and those trumpeted by Brady and Holtz-Eakin.
No wage gains for most workers. The NBER authors found that the tax cuts delivered wage gains of about $750 per worker per year on average, not the $4,000 to $9,000 wage gain per worker predicted by the Trump administration. But the key word here is “average.“ The median wage gain (the gain of the worker in the middle of the wage distribution) was zero. That’s not all. When economist Patrick Kennedy and his co-authors looked into the distribution of the wage gain, they found that, “Labor earnings increased for workers in the top 10% of the within-firm earnings distribution, and rise particularly sharply for executives, but do not change for workers in the bottom 90%.” Two-thirds of those gains went to firm owners and executives, and one-third went to high-paid workers. None of the gains went to lower-paid workers.
Corporate tax cuts are expensive. Chodorow-Reich, one of the NBER authors, told the New York Times that, “the evidence that corporate tax cuts are expensive also is there.” “Expensive” means that cutting the taxes of corporations would be paid for with large losses of tax revenues that the government could have put to other uses.
The four NBER authors found no evidence to suggest otherwise. The revenue-increasing effects of the tax cut from increasing investment and taxable profits were not large enough to offset the revenue-reducing effects of the tax cuts from 35% to 21%, as Trump Treasury Secretary Steven Mnuchin had promised. They added that the immediate expensing provision meant that any increase in investment would yield few additional tax revenues.
The 2017 cut in corporate taxes was the largest on record. So, too, was the loss of corporate tax revenues. Economists Zidar and Zwick, two of the NBER authors, report that corporate tax revenues dropped from about $375 billion per year in the years immediately before the Trump tax cuts to below $250 billion per year after the tax cuts. The cuts in corporate taxes will end up costing $1.3 trillion over 10 years, according to the Congressional Budget Office.
Corporate tax cuts matter for investment. The model employed by Chodorow-Reich and his co-authors estimated that the 2017 cut in corporate taxes led to “a long-run increase in domestic corporate capital of 7.2%.” (That is the equivalent of a 7.2% increase in investment in 15 years, their measure of the long run.)
Both the reduction in the corporate tax rate and the ability to immediately write off all domestic investments led to more investment. They estimated that cutting the corporate tax rate from 35% to 21% alone “delivers an increase in domestic capital of about 4.5% after 15 years,” and that “the expensing provisions increased capital by about 2%” by itself, and that the other corporate tax provisions did less to increase capital. While the cut in corporate tax rates had the larger effect, it is also the more expensive of the two provisions, and therefore “underperforms expensing on a bang for the buck basis.” In other words, a dollar reduction in corporate taxes devoted to expensing did more to increase investment than a dollar reduction in corporate tax rates. That’s because the expensing provision is applied only to new investments, while lower corporate tax rates are applied to profits earned from previous investment decisions and not just profits on new investments.
Don’t Renew, Revise
Renewing the Trump tax cuts (including the corporate tax provisions) would cost $4 trillion over the next 10 years. NBER authors Zidar and Zwick propose renewing the expensing (or immediate write off) of new investments to encourage corporate investment and pay for continuing that tax cut by raising the corporate tax rate from 21% to 28%. They would also reinstate the higher tax rates on dividends, capital gains, and estates. Their tax hikes are welcomed. Biden’s “Made in America Tax Plan” would also increase the corporate income tax rate to 28% and enact a 15% minimum tax on large corporations with high profits.
Also crucial is raising the tax rate on stock buybacks from 1% to 4%, as proposed by the Stock Buyback Accountability Act, which is sponsored by Democratic Senators Sherrod Brown and Ron Wyden. But their proposal is weak tea. Stock buybacks were illegal—and considered a form of stock manipulation—before being legalized by the Securities and Exchange Commission in 1982. It is also time, as the Center on Budget and Policy Priorities has emphasized, to use the monies that have been devoted to corporate tax cuts to increase public spending for childcare and housing and to provide an expanded and fully-refundable child tax credit—all measures that would improve the lot of most people and strengthen the economy.
Beyond that, whatever monies the government does devote to tax cuts and other incentives to encourage corporate investment must serve a broader purpose, such as green industrial policy to combat global warming. Otherwise, tax breaks to corporations will continue to enrich their owners while doing little or nothing to improve the economic and living conditions of most people.
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