Tax cuts are generally a very popular policy. As then Speaker of the House Paul Ryan and other proponents of the 2017 Tax Cuts and Jobs Act argued, who doesn’t want their government to “giv[e] the people their money back”? President Donald Trump went even further, claiming that the “…huge tax cut will be rocket fuel for [the] economy” by creating new investment, raising workers’ wages and bonuses, and increasing growth.
At a first glance, at least some of these claims seem plausible. Yes, income tax-cuts do effectively ‘give people their money back’, and yes, macroeconomic theory does posit that some tax-cuts stimulate growth. But it has to make sense to stimulate growth in the first place: tax-cuts are most effective when the economy is below full potential and when the cuts benefit low-income earners. This is due to what economists call ‘multiplier’ effects; increased cash-in-hand allows both people and businesses to spend more, which stimulates another wave of spending and so on and so forth. The larger the multiplier effect, the greater the stimulus on growth. The Tax Policy Center estimates that multiplier effects are about three times greater when the economy is weak, and significantly greater for low-income earners than for their high-income peers as low-income earners will spend a larger share of their tax-cut benefit.
The Tax Cuts and Jobs Act targets neither of these multiplier effects; in fact, it does the exact opposite. The economy in 2017 was at or near full employment with U.S. Bureau of Labor Statistics projections indicating full potential output. And most of the Act’s benefits went to high-income earners and corporations over low-income earners.
Unsurprisingly, preliminary data indicates that the tax cuts have been more akin to tepid lantern oil than rocket fuel for the economy. Most pre-Act projections predicted growth of 2.7-2.9%, and the actual growth figure was 2.9% for 2018. Various government and non-partisan estimates attribute about 0.3% growth to the tax-cuts. Not only is this result a far cry from the 5-6% growth the Congressional Research Service estimated would be needed to offset the lost tax revenue of the cuts, but it also represents a feeble and expensive stimulus; the cuts reduced tax revenue by over 150 billion dollars with no countervailing reduction in spending.
And the nefarious claim that corporate tax cuts would “trickle-down” to workers via higher wages and bonuses has also been thoroughly debunked: only 2-3% of the total corporate tax-cut benefits in 2018 were transferred to workers, averaging out to 28 dollars per worker. The vast majority of the benefit was ‘spent’ on corporate stock buy-backs summing to a record-breaking trillion dollars. Corporations clearly had little economic incentive to give workers bonuses and every incentive to increase share-holder value via stock buy-backs.
Investment spending, while experiencing some growth, did not fall in line with the expected supply-side effects of the Act. Structures followed by equipment capital were most ‘discounted’ by the Act’s cuts, yet intellectual products, which actually received a small negative incentive, grew at the fastest rate. In other words, the Act had, at best, a muddled effect on investment growth and will most likely not have any major impact going forward. All this was not unexpected; the Congressional Budget Office expected modest growth from the Act, 0.7% at best.
What was surprising was the level of public distaste for the Act: by December 2017, almost two-thirds of Americans believed that the Act was mainly for the benefit of the rich and corporations with a majority disapproving of the bill. Recent follow-up polling by CNBC shows that the public remains mostly unchanged in that view.
And for good reason. Tax cuts are powerful economic levers that can stimulate the economy while also acting as a force for a more equitable economy. Yet, the Tax Cuts and Jobs Act has proven to be anything but. On balance, none of what the Act’s proponents promised has transpired: not the economic growth that more than ‘pays’ for the cuts, and certainly not ‘trickled-down’ benefits for workers.
Then who benefited from the Act, if not the average Americans it was supposed to help? As Congress and the administration mull new tax legislation, lawmakers should seriously contemplate the material effects of any new laws on the average American. Because as it stands today, the majority of Americans do not see the current tax laws, ostensibly passed on their behalf, as working for them.
John is a Junior studying Computer Science and Economics at UC Berkeley. He is passionate about economics and political economy and is particularly interested in the implications of automation and the fourth Industrial Revolution. John has experience in the biotechnology industry and will be interning at Amazon this summer. In his free time, John enjoys playing poker, scouring random research literature, and napping.