Last month, President Trump revived one of his preferred descriptors for the tax cuts that he signed into law in December 2017.
"We promised that these tax cuts would be rocket fuel for the American economy, and we were absolutely right,” Trump said at a roundtable event in Minnesota.
He used that “rocket fuel” line before the tax cuts passed, too, pledging that the cuts would inject new energy into an already strong economy. Sure, independent analysis figured that the cuts would cause the deficit to spike. But Trump allies pledged that the cuts would spur so much economic growth that the bill would end up increasing tax receipts, as people and companies paid higher taxes on their higher incomes. Companies would bring money back from overseas and use the cuts to expand operations. The law would, in short, pay for itself, some proponents claimed, with the net effect of increasing wages and employment.
"At the heart of America's revival are the massive tax cuts that I signed into law a year ago,” Trump said at an event for the National Association of Realtors in May. “And they are like rocket fuel for America's economy."
It’s a bit odd for Trump to claim that tax cuts signed into law in December of his first year in office are responsible for “America’s revival,” given that the unemployment rate dropped from 4.7 percent in January 2017 to 4.1 percent the month the law was enacted — and, 16 months later, is only at 3.6 percent. (Especially given that the decline has been fairly steady since 2010.)
It’s also a bit odd because while year-over-year economic growth has increased since the last quarter of 2017, it has been increasing since the second quarter of 2016.
But it’s particularly odd because analysis released this month by the nonpartisan Congressional Research Service shows that the effects of the tax law have been at best minimal.
"In 2018, gross domestic product (GDP) grew at 2.9%, about the Congressional Budget Office’s (CBO’s) projected rate published in 2017 before the tax cut. On the whole, the growth effects tend to show a relatively small (if any) first-year effect on the economy,” the report's summary reads in part. “Although growth rates cannot indicate the tax cut’s effects on GDP, they tend to rule out very large effects particularly in the short run."
That's followed by a number of other “althoughs,” which serve as rebuttals to common assertions made by Trump and his allies.
Although the economy did grow, the cuts came nowhere close to paying for themselves. “[T]he combination of projections and observed effects for 2018 suggests a feedback effect of 0.3% of GDP or less,” the report reads — “5% or less of the growth needed to fully offset the revenue loss from the Act.” In other words, 95 percent of the increase in the deficit wasn’t offset at all.
Although wages grew, they grew more slowly than GDP. “If adjusted by the GDP deflator, labor compensation grew by 2.0%,” it reads at another point. “With labor representing 53% of GDP, that implies that the other components grew at 3.8%. Thus, pretax profits and economic depreciation (the price of capital) grew faster than wages.” Put another way, companies saw a greater increase in earnings than workers did. Modest inflation-adjusted wage growth “is smaller than overall growth in labor compensation and indicates that ordinary workers had very little growth in wage rates,” the report states.
Although money was repatriated from offshore tax shelters, the money doesn’t appear to have been used for investment in expanding the companies. “[M]any factors can affect net capital inflows,” it reads, “including domestic borrowing by the government and domestic saving, but the evidence does not suggest a surge in investment from abroad in 2018.”
Although the repatriation and cuts occurred, “relatively little” went to the worker bonuses that Trump celebrated after the cuts were signed into law. “One organization that tracks these bonuses has reported a total of $4.4 billion,” the report states. “With US employment of 157 million, this amount is $28 per worker. This amount is 2% to 3% of the corporate tax cut, and a smaller share of repatriated funds.”
Put directly, the CRS report finds no justification for Trump’s dubious claims that the tax cuts served as a significant boost to the economy, much less played a central role in “America’s revival.”
The impression that’s given isn’t “rocket fuel.” In terms of apparent saturation, it was something more akin to “water poured onto concrete.”