White House still confident tax cuts will produce sustained growth, but experts have doubt

    President Donald Trump displays the $1.5 trillion tax overhaul package he had just signed, Friday, Dec. 22, 2017, in the Oval Office of the White House in Washington. (AP Photo/Evan Vucci)

    One year after President Donald Trump signed the Tax Cuts and Jobs Act, the White House is celebrating the legislation as a “clear economic success,” but economists say the jury is still out and not all the evidence available so far is encouraging.

    “What you would traditionally expect is these sorts of reforms would take several years to work their way through the U.S. economy,” said Nicole Kaeding, director of federal projects at the Tax Foundation.

    Some effects were immediate after the new tax rates kicked in earlier this year and the financial stimulus was injected into the economy, but the broader trends are murkier.

    “There are all these specific issues that kind of muddy the waters,” said Bill Gale, co-director of the Urban-Brookings Tax Policy Center and author of “Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future.” “If you pull the lens back and look at the big picture, you’ve got the Congressional Budget Office projecting there’s almost no increase in Americans’ incomes, and you’ve got pretty much everybody saying this is a bigger cut for the rich than for the poor.”

    The TCJA slashed the corporate tax rate from 35 percent to 21 percent and changed the tax code’s treatment of pass-through businesses. For individual tax filing, it eliminated personal exemptions and approximately doubled the standard deduction while removing many itemized deductions and limiting others. It also increased child tax credits and zeroed out the penalty for not obtaining health insurance under the Affordable Care Act. The business tax code changes are permanent, but most of the provisions impacting personal taxes expire by 2028.

    In the 12 months since the bill passed, gross domestic product growth has pushed up past 3 percent, unemployment has fallen to the lowest level in decades, wage growth has accelerated slightly, and the federal deficit has increased by nearly 20 percent.

    “I think this is very much going according to expectations at this point... These sorts of reforms increase investment, which grows the U.S. economy,” Kaeding said.

    About 80 percent of taxpayers are seeing a net tax cut this year, according to the Tax Foundation, and businesses are already profiting from reduced corporate rates. For workers, wage growth was up about 3.1 percent year-over-year in October and November, the strongest showing in several years.

    “Bureau of Economic Analysis data shows that after-tax domestic corporate profits rose from an average of 6.7 percent of GDP over the first three quarters of 2017 to an average of 7.5 percent of GDP over the first three quarters of 2018, while taxes on corporate income fell from 2.7 percent of GDP over the first three quarters of 2017 to 1.7 percent of GDP over the first three quarters of 2018,” said Hunter Blair, a tax and budget analyst at the Economic Policy Institute.

    According to Gale, the tax code changes have increased after-tax income for the top quintile of households by nearly 3 percent, but the bottom quintile has seen income growth of less than 0.5 percent.

    “The tax cut has made income less equal... and its increased the deficit,” he said.

    The Congressional Budget Office now estimates the cumulative cost of the tax cuts over the next decade will be $1.9 trillion even after accounting for economic growth. In April, the CBO projected GDP growth in 2018 would hit 3.3 percent but trail off below 2 percent by 2020, with the unemployment rate falling close to 3 percent in 2019 before creeping up toward 5 percent by 2028.

    “The notion the tax cuts are going to pay for themselves I think is nonsense,” Gale said.

    During a press briefing touting the success of the tax cuts Wednesday, Kevin Hassett, chairman of the White House Council of Economic Advisers, did not go quite so far as claiming they will pay for themselves, but he insisted projections that are pegging the cost at nearly $2 trillion over ten years are significantly low-balling likely economic growth.

    “We got a capital-spending boom underway, and everybody is expensing it,” he said. “And so, capital revenues are down because of all that expensing. But those machines are going to produce revenue and output in the future. And if that feeds back, then we expect the budget costs to be much lower than the static score.”

    There is no dispute that the tax cuts have fueled increased economic activity this year, but exactly how much and how long it will last is debatable. Gale doubts the gains are sustainable because the economy and job market were already strong when the bill passed.

    “It has to trail off,” Gale said. “The economy was basically at full employment and then the government stimulated it with tax cuts and spending increases.... An economy that’s already running hot and then stimulated further can’t possibly sustain that pace in the long term.”

    The White House points to many positive economic indications and downplays the more troubling ones, including a stock market struggling through its worst December in decades. Hassett insisted Wednesday the GDP growth seen in 2018 is more than just a one-year “sugar high.”

    “There's nothing in our data, other than the sort of financial market jitteriness, that suggests that the fundamentals are changing,” he said.

    According to Blair, the only way to get the kind of growth the Trump administration expects is with more federal spending or more tax cuts, neither of which is especially likely with a divided Congress in the next couple of years.

    “The GDP growth we saw this year was the result of increased fiscal stimulus – stemming largely from increased public spending from the budget agreement earlier this year,” he said. “For stimulus to continue to boost growth, we’d need ever rising spending or ever falling taxes. With the Fed steadily raising rates, including yesterday, and with those higher rates already affecting residential investment, those higher rates will drag more on growth next year without further stimulus to counterbalance them.”

    Even though about four out of five taxpayers are paying less in taxes this year, the TCJA remains unpopular with the general public. An October Gallup Poll found 39 percent approve of the legislation and 38 percent say the tax cuts have helped them financially. Hassett argued the positive effects of the reforms are being felt more strongly than favorability of the law itself suggests.

    “We talk a lot about small business sentiment; you know, that’s at an all-time high,” he said. “Consumer sentiment is looking really solid as well.”

    Many companies have taken advantage of a one-time reduced rate for repatriation of overseas funds, but few have turned around and reinvested that money or used it to increase wages. More often, they have used stock buybacks to reward shareholders. Gale cautioned against reading too much into that trend at this point.

    “At first glance at least, that sounds like a bad thing,” he said. “It sounds like companies aren’t investing the money or investing in workers, but the reason that’s a little misleading is the companies that had the opportunity to repatriate funds may not be the same ones that currently have good investment opportunities.”

    According to Kaeding, the impact of any new capital investment spurred by the tax cuts or the repatriation of funds will take a while to funnel down to workers.

    “That’s really a three, a five, a seven-year process. Unfortunately, in politics that’s a very long time,” she said.

    Business investment did increase in the first two quarters of 2018, but it was flat in the third quarter. Blair is skeptical companies are stepping up spending to the degree the bill’s proponents expected.

    “With no change in the behavior that has characterized investment over the couple years before, it doesn’t look to me like the TCJA has been a game-changer for investment,” he said.

    Hassett stood by his past prediction that the corporate tax cuts will eventually result in a $4,000 salary increase for workers.

    “The growth effect that we modeled last year is what gave you the wage effect that the president talked about -- the $4,000,” he said. “And we got exactly the growth effect we predicted last year, and we're starting to see it feed through into productivity and wages.”

    In the months after the TCJA was passed, hundreds of companies publicly announced one-time bonuses for employees as a result of the windfall they were receiving from the corporate tax cut and repatriation holiday. According to the Economic Policy Institute, though, growth in private sector bonuses between December 2017 and September 2018 amounted to only $0.02 per hour.

    While the grand benefits the tax bill’s advocates promised have yet to materialize, the economic apocalypse some critics predicted has not arrived either.

    “I have said that this was stiff competition by some of the other things they have put forth, [this] is the worst bill in the history of the United States Congress,” House Minority Leader Nancy Pelosi, D-Calif., said before the bill passed last year.

    Rising deficits have not hit the brakes on growth yet, but with no apparent path to reduce them, experts expect they eventually will become a greater concern.

    “As the growth effects subside, the deficits will have more impact,” Gale said.

    Hassett stressed the White House’s projections assume many other proposed Trump policies will be enacted, including making the individual tax cuts permanent. Despite political headwinds, he suggested more tax cuts are still possible in 2019.

    “I would hope that the sort of clear economic success of the tax bill would make it a non-partisan issue to extend things and maybe even try it again because it works so well,” Hassett said.

    Experts caution the tax cuts do not exist in a vacuum, and it is not always easy to distinguish their effects from those of other economic policies. A budget deal that increased domestic and military spending earlier this year provided additional stimulation to the economy, but some of President Trump’s policy decisions since then, including imposing new tariffs on many imports, have likely slowed down growth.

    “The challenge is economic data is noisy,” Kaeding said. “It’s very difficult to look at one piece of economic data and say it is for certain because of the tax reform or it is not because of the tax reform.”

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