US President Donald Trump and the GOP present themselves as fiscal conservatives by stressing the importance of dealing with the budgetary deficit and national debt. Yet, they are also the ones that increased the debt, which stands at around $22 trillion, by $1-2 trillion over the next 10 years with the introduction of the Tax Cuts and Jobs Act (TCJA), an across the board reduction in taxes for individuals. The corporate tax rate dived from 35% to 21% too, with the TCJA costing government revenues $1.5 trillion over the next ten years. Trump claimed the money saved by businesses would create jobs, boom the economy and put an average of $4,000 in wages into the pockets of American families (he failed to mention this is supposed to be over the next decade) with a deficit-neutral bill.
However, with the TCJA, Trump and the GOP have instead actually increased the deficit, despite often claiming to care about dealing with it. Rich corporations have benefitted the most, rather than the American worker. Wealth has trickled down but painfully slowly, one small drop at a time.
The Act was rushed through Congress with alarming speed and secrecy, with no plans on where the $1.5 trillion would come from, given the failure of the Border Adjustment Tax proposal. In fact, the actual cost of the bill was higher than $1.5 trillion, but through some sleight of hand manoeuvres in a meeting between Senators Patrick Toomey and Bob Corker (pictured below), Republicans could make it look like the cost was a lot smaller on paper.
One way they did this was by arguing that the TCJA would generate $1 trillion in revenue over the next ten years, as suggested by the Tax Foundation, a figure that most studies simply don’t agree with – the Joint Committee on Taxation (JCT), for example, found the true revenue of the tax cut to be $407 billion, around $1 trillion from deficit-neutral, a similar result found by the Penn Wharton Budget Model. Republicans also used current policy accounting to hide around $500 billion from the bill, a practice that Chye-Ching Huang, director of federal fiscal policy at the Center for Budget and Policy Priorities, calls a ‘gimmick used to obscure the true cost of the tax cuts’. But by citing the Tax Foundation and using current policy accounting, they could argue the bill was deficit-neutral, something that is untrue.
Further, the Tax Foundation predicts that there will be a 1.7% increase in GDP over the next 10 years. This is the most optimistic figure, which most studies disagree with; as the Tax Policy Center writes ‘the central tendency indicates that the effect on the size of GDP ranges between 0.1 and 1.1%‘. This means that the TCJA will still ‘reduce federal revenues by significant amounts, even after allowing for the modest impact on economic growth’. To put a potential figure to all this, the Congressional Budget Office predicts the debt will stand at an extra $1.9 trillion in 2027 even after allowing for the economic growth caused by the bill, whilst the JCT predicts this will be just under $1.1 trillion.
Is business booming? One survey suggests that 84% of businesses have no plans to use their tax cuts to change their investment or hiring plans.
How is the TCJA benefitting American citizens?
When you look at the figures, the results aren’t that impressive. For example, within the first 3 months of the TCJA, wages rose by just $233 per year, nowhere near the $4000 the Trump administration carelessly promised. The Congressional Research Service (CRS) found that wages for workers rose by just 1.2%, concluding that ‘ordinary workers had very little growth in wage rates‘. Meanwhile, bonuses averaged just $28 per worker, whilst businesses spent 246 times that amount on their own stock, putting money into their shareholders’ pockets. In fact as of December 2018, over half of the money saved has gone to shareholders.
In terms of income saved, the Act favoured higher earners, as the of the lowest quintile had an increased after-tax income in 2018 by 0.4%, compared with 2.9% for those in the top quintile. Those in the top few percentages of households had an even higher increase, whilst the huge corporate rate decrease obviously benefitted the rich corporation owners and shareholders.
The fact is that just 6% of the tax cuts, framed around the American family and worker, have so far gone to their intended recipients. Meanwhile, more and more American companies pay essentially zero tax through a series of tax loopholes.
Not everything about the TCJA and tax savings is bad though, such as the creation of Opportunity Zones, areas that are distressed economically. A well-intentioned program that gives tax benefits to investors investing in businesses in these areas, hopefully, money spreads throughout the zones, rather than only going to certain high profit, low-risk ventures, avoiding the need for an ‘OZ Part 2′. The idea is solid, with its progress being monitored by the Opportunity and Revitalization Council. But their creation does not redeem the TCJA.
What’s important to take away from all this is that the TCJA is somehow being upheld by Republicans as a victory. Texas Senator Ted Cruz wrote a letter to the Secretary of the Treasury to ask the Trump Administration to index capital gains to inflation, another tax break that would exclusively benefit the mega-rich. In that letter, he said ‘The United States economy has experienced historic levels of growth as a result of Congress and the current Administration’s policies such as the [TCJA]‘.
But in reality, the TCJA has had very little impact on growth, wages or GDP. It didn’t even pay for itself in 2018, ‘generating 5% or less of the growth needed to fully offset the revenue loss from the Act’, according to the CRS. As we have seen, most projections also suggest the Act will not pay for itself in the long run.
It also completely contradicts typical Republican ideas on addressing the deficit, showing that their concern is only present when on the campaign trail. All the while, the main winners of the cuts were the rich.
It seems that the only achievement of the TCJA so far is that it’s Trump’s major legislative victory as President.