Trump’s tax cut was a mammoth fraud
S E E D E D C O N T E N T
"...two years later, the evidence of failure is undeniable. Almost every promise made has been a promise broken."
Trump and his party took great pride in enacting the biggest tax overhaul in a generation. “It’s going to be a tremendous thing for the American people,” the president exulted. But like most things he says, that claim was unfounded. The package turned out to be an extravagant mirage.
Americans thought they got a tax cut. What they really got was a tax increase that hasn’t yet taken effect. When you cut taxes but don’t cut spending to match, as the Nobel laureate economist Milton Friedman often noted, you are not cutting taxes but merely delaying them. And total spending has not been reduced; it has been raised.
The 2017 bill cut individual and corporate tax rates, raised the standard deduction, limited deductions for state and local taxes and allowed businesses to immediately write off outlays for new equipment, among other provisions. We were told it would propel economic growth to new heights, unleash a flood of capital investment, turbocharge job creation and boost wages.
The supporters claimed that they could cut taxes without actually cutting revenue. Senate Republican leader Mitch McConnell said: “I’m totally confident this is a revenue-neutral bill. I think it’s going to be a revenue producer."
But two years later, the evidence of failure is undeniable. Almost every promise made has been a promise broken.
Economic growth, Trump predicted, “could go to 4, 5 and maybe even 6%.” In fact, the effect on the economy has been imperceptible. GDP didn’t even reach 3% in 2018. Growth in the most recent two quarters was around 2%. The Wall Street Journal’s latest survey of economists projects it will slow to 1.8% in 2020.
Trump says the economy is in “a boom the likes of which we have never seen before.” Actually, we have seen it before, when Barack Obama was president. GDP growth in 2015 was 2.9%, the same as it was in 2018. In the 1990s, by contrast, annual growth rates often reached 4%. Looking only at a graph of growth rates over the past decade, you wouldn’t know the 2017 tax measure had ever happened.
Business investment in the United States, far from rising, has plunged this year. The huge reduction in corporate income tax rates, from 35% to 21%, has not had the irresistible incentive effect that it was supposed to.
Job creation has chugged along at a steady pace over the past two years, with no discernible help from the tax changes. In the past two years, the U.S. economy has added fewer jobs than it did in the final two years of Obama’s presidency. In employment terms, the tax measure has been a nothing burger.
The biggest downside, though, is the total cost of the measure, which the bipartisan Committee for a Responsible Federal Budget now estimates at $1.9 trillion over 10 years. Far from being a “revenue producer,” it has been a revenue loser. CRFB said last year that revenue fell 5.4% in inflation-adjusted dollars and 8.1% as a share of the economy.
The budget deficit, thanks in part to the tax bill, has nearly doubled under Trump, from $665 billion in 2017 to a projected $1.1 trillion this year. It’s on track to exceed $1 trillion in each of the next three years. The total federal debt — which Trump promised, ridiculously, to pay off in eight years — has risen by more than $3 trillion since he arrived.
Things are about to get worse yet. The tax legislation just signed by Trump repeals some taxes and extends some revenue-losing provisions that would have expired. It will add another $500 billion to the debt over the next 10 years.
The 2017 tax package was a mammoth fraud that put the GOP’s political priorities and ideological dogma ahead of the welfare of our children and grandchildren. That’s the nature of Trump’s presidency: Even his proudest achievements are cause for regret.
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Hey thanks for seeding a legitimate criticism of Trump. It can be done!
All that talk of 4, 5, and 6% growth was always unrealistic, in my opinion. Maybe in the long term, we could achieve that, but so much of our economy has transitioned from manufacturing to consumerism and service, that I just don’t see it.
I was never really a fan of the Trump tax cut. While I am always happy to pay less taxes - and I even think corporate tax rates should be as low as we can make them - I didn’t see the necessity in this last cut.
Also, if you’re going to cut taxes with this budget, you need to cut spending by a lot, and nobody seems to want to do that. Thus: the deficit issues.
I really think he did it just for the votes.
Damn! We finally agree on something other than tires.
Michelins?
Two years ago, President Trump accomplished his signature legislative achievement: the Tax Cuts and Jobs Act.
The law was the biggest overhaul to the nation's tax code in three decades, and the president pitched it as "rocket fuel" for the American economy. It permanently slashed the corporate tax rate to 21% from 35% while also providing temporary benefits for individuals and their families.
Critics argued it was a windfall for massive corporations at the expense of the middle class. Meanwhile, supporters of the tax cuts contended it would unleash an economic bonanza. Businesses would invest in their operations, they said, resulting in improved worker productivity and higher wages.
Treasury Secretary Steve Mnuchin, among others, said the law would juice the nation's gross domestic product to 3% (or more, as Trump said 6%) and soon pay for itself and spread prosperity.
But the law has achieved none of the ambitious goals that Republicans put forward - and there are scant signs they ever will.
There were short-term bumps in GDP growth and business investment that faded relatively quickly. Wages increased, but not to the extent Republicans promised.
And the law's hefty price tag has not been offset by more tax dollars flowing to government coffers. Corporate tax receipts are down 23% since fiscal 2017. The Congressional Budget Office projected the GOP tax cuts will widen the deficit by $1.9 trillion over a decade.
Further, one study recently found evidence suggesting that corporations are now paying the lowest tax rates in four decades. The average rate last year for 400 of the largest US companies averaged out to 11.3%.
Here are seven charts demonstrating why the tax cuts were not the "rocket fuel" Trump promised.
GDP growth has averaged 2.4% since Dec. 2017, short of the 3% estimate that the Trump administration repeatedly touted.
Ruobing Su/Business InsiderUS GDP ticked upward in the early months of 2018, helping the economy achieve 3% growth during the first year of the law, an early success for it.
However, that momentum slowed in 2019, the product of anxiety among business leaders on Trump's trade wars and weak demand overseas.
Most economists also don't believe that reaching and keeping growth at 3% is feasible in the immediate future. The CBO recently projected that GDP growth would slow through the next decade to just under 2%.
A White House report earlier this year found that maintaining a sustained "boom" with 3% annual growth would require infrastructure spending, a new round of tax cuts or more deregulation - which are unlikely to pass the Democratic-led House anytime soon.
Job growth has kept steady, but the tax cuts had a limited impact.
Ruobing Su/Business InsiderMeasuring job growth after the tax cuts provides a mixed picture.
The number of new jobs gained in the immediate months following the cuts were similar in scale to the previous few years. Some corporations like Apple said they would add 20,000 domestic jobs over five years and others such as Walmart increased starting wages and expanded some benefits.
Still, automation and outsourcing continued to hit other industries. Bank of America cut 5,000 jobs in 2018 even as it generated billions in record profits.
Employment remains steady though the economy shows signs of slowing down. But studies suggest the tax cuts had a limited impact promoting job growth.
The National Association of Business Economics released a survey earlier this year finding the overwhelming majority of US businesses - or 84% - didn't speed up their hiring or invest more as a result of the Republican tax cuts.
The tax cuts didn't dramatically ramp up what workers earn in an average hour.
Ruobing Su/Business InsiderTrump tried championing the law as a boost to the middle class, saying that average household incomes would increase by at least $4,000 a year . Many economists said the promise was very unlikely to pan out, given companies could easily access additional capital cheaply to shore up operations.
The White House later pointed to the rise of average hourly pay as a sign of the law's success.
But it hasn't edged substantially upward since December 2017, hovering between 2.8% and 3.6% up until now.
One estimate from Macroeconomic Advisors, an economic research firm, found that average hourly growth would have to reach 7.8% this year to reach the $4,000 income boost for US households. It only stood over 3.3%, the firm said.
Consumer confidence fluctuated through 2019 — and the tax cuts had little to do with it.
Ruobing Su/Business InsiderConsumer confidence has fluctuated alongside the country's economic performance over the last two years, edging upward in early 2018. The Republican tax cuts, though, have polled poorly with the public since then.
The majority of taxpayers did receive a cut, though it was very small and surveys showed most Americans didn't notice it in their take-home pay or tax bills. That suggests the law had a limited impact shaping voter's views on the health of the economy.
Other factors, like global trade war fears, have weighed more on US consumers recently.
The University of Michigan consumer confidence survey's chief economist told the Wall Street Journal earlier this year that "the impact of the tax reform legislation on consumer confidence has all but disappeared."
Capital spending has steadily decreased in the last two years, mainly the product of uncertainty of Trump's ongoing trade wars.
Ruobing Su/Business InsiderCapital expenditures refers to investments that businesses make in new equipment, buildings, and technology that they use to expand and improve existing operations.
There was an initial jump after the tax bill was passed, but it faded through 2018. It took a hit as lower oil prices and Trump's trade war with China injected uncertainty into the global economy.
The International Monetary Fund found in an analysis of Fortune 500 companies that only 20% of increased revenue was spent on capital expenditures - the other 80% went to investors through buybacks or dividends among other asset adjustments.
Usually, expectations of future growth drive increases in capital spending. The corporate outlook, though, hasn't improved and business investment declined through 2019 as companies wrestle with trade war uncertainty.
The tax cuts didn't reverse the decline in manufacturing activity.
Ruobing Su/Business InsiderThe manufacturing index measures production levels each month and it's considered a key indicator of the US economy's broader health. Readings below 50 indicate a contraction of activity.
While the GOP tax cuts jolted the sector and helped create manufacturing jobs - averaging 20,000 a month in 2018, the highest in three decades - it didn't reverse a downward trend in this index.
Domestic producers suffered a brutal hit with the ongoing trade war with China and slowing global growth. Major corporations like General Motors posted record revenues but continued laying off workers in their factories.
The latest ISM measure for November stood at 48.1 , the fourth straight month of a reading below 50 that signals contraction. It reflects continued weakness in new orders and exports.
Stock buybacks, however, set records in 2018, the first full year of the Trump tax law — and they're higher than before the law was enacted.
Ruobing Su/Business InsiderBuybacks reduce the number of shares a company has on the market, which jacks up their stock price to the benefit of stockholders and corporate executives.
Corporations were some of the most enthusiastic supporters of the 2017 tax cuts. And it's easy to see why: they reaped most of the law's rewards.
Last year, the nation's largest 500 companies invested far more into buying back stock than they did to expand operations with their tax savings. Buybacks surpassed a record $1 trillion in 2018, 50% more than the prior year.
In 2019, however, global economic uncertainty pushed the number of buybacks downward. Goldman Sachs estimated that the total amount of buybacks would slide down to $710 billion.