According to President Trump, there's one overriding reason America needs tax cuts: They’ll get the economy humming. “It's called a middle class miracle,” Trump said at the end of September.
This isn’t a liberal versus conservative debate. This is a White House and top GOP leaders versus pretty much everyone else debate.
America averaged about 2 percent growth a year for much of the recovery under President Barack Obama. After tax cuts, Trump promises annual growth of 3 percent or more (the White House website currently predicts 4 percent gross domestic product growth per year under Trump).
The vast majority of economists — on Wall Street, at big corporations and in academia — forecast just 2.1 to 2.25 percent growth after tax cuts, hardly an economic renaissance.
Goldman Sachs, the Wall Street bank that supplied some of Trump’s top economic advisers, keeps telling its clients to expect a “modest” impact from the Trump-GOP tax plan.
Here's how Goldman put it in a research report last week: “Overall, the research literature appears to suggest that tax cuts can have modestly positive supply-side effects, though some studies find no effect,” Goldman wrote.
“Modestly positive” — with a side of “some studies find no effect” — is far from the “giant” and “massive” uptick Trump promises.
Goldman Sachs is hardly a liberal organization. It's a Wall Street bank that was dubbed the “vampire squid” during the Great Recession because it sucked up profits as so many people on Main Street lost out. Goldman Sachs also has a reputation for being very optimistic, routinely telling clients the stock market and economy are going to soar. So when Goldman says expect only 0.1 to 0.2 percent growth from Trump's tax cuts, it's telling.
This debate between the White House and independent economists matters because Trump's and Republican leaders' push for tax legislation is that, they claim, it will lead to more growth, which should, in turn, lead to more jobs and higher wages. If the growth is puny, it's unlikely to do much for jobs or wages. It's also likely to add heavily to America's $20 trillion debt if the tax cuts aren't offset with spending cuts or tax increases elsewhere.
Lately, Trump has been dispensing his deputies to hammer the message home that lower taxes will bring a big economic boost. Kevin Hassett, the head of Trump's Council of Economic Advisers, is currently making the rounds in the Washington D.C. think tank circles.
“I'll repeat it again: existing evidence clearly indicates taxes matter for the economy,” Hassett, a PhD economist, said Thursday at an event at the Urban Institute in the District. He predicted GDP would go up “much more than 1 percent” to 3 percent GDP a year (or better) after the Trump tax plan is enacted.
There are two basic ideas behind the Trump-GOP tax plan. The first is that lowering taxes on people will put more money in their pockets. If they go out and spend that extra cash on groceries, gyms or video games, etc., it bumps up private-sector growth. The consensus among economists is tax cuts for individuals help somewhat, but the boost is normally short-lived. Plus not every $1 of tax cuts makes it into the economy because some people, especially the wealthy, end up saving the money instead of spending it.
The second rationale for the Trump plan is that lowering taxes on businesses will cause corporations to stay in the United States and give some of their extra cash to workers with more jobs and higher wages.
There's widespread agreement that something needs to be done to prevent U.S. companies from fleeing abroad (or just stashing money overseas) to pay lower taxes. Where the controversy comes in is over how much working class people are going to benefit from cutting business taxes. The reality is U.S. companies have been earning record profits for the past several years, yet wage growth has been anemic. Will companies really turn around now and give more money to workers?
The White House says yes. The argument Hassett and others make is that tax cuts will spur businesses to invest more in technology and new factories. That makes workers more productive, and companies typically pay workers more when they produce more.
“For the median household in the U.S., a top corporate marginal rate cut from 35 to 20 percent would boost wage growth almost fourfold — from the current 0.6 percent per year to as much as 2 percent, providing up to $7,000 in additional income,” Hassett argued. (He is the co-author of a research paper that says every $1 of higher business taxes leads to $2 less in wages.)
But Goldman Sachs sees it differently. Economists at the Wall Street bank concluded that shareholders — the people who own stock in a company — typically get most of the benefits of tax cuts, at least in the first few years. Down the road, workers may see some uptick in wages, but it depends on whether businesses actually take the extra money from tax cuts and invest in more factories and technology. Economists are skeptical that will happen, especially if the tax plan ends up adding to the U.S. debt.