Two years ago, US president Donald Trump signed into law a sweeping tax cut that logistics giant FedEx’s CFO once dubbed “a mighty fine Christmas gift.”
Backers of the Tax Cuts and Jobs Act (TCJA) said it would boost the economy by encouraging American companies to spend the capital they saved on growing their companies, and push foreign investors to pump money into the United States. It would also simplify America’s vastly complex tax system, Trump argued, and improve wages and job numbers.
The law’s opponents insisted it was a massive giveaway to the super rich—one that would make the federal deficit skyrocket.
The early data doesn’t look good for one of Trump’s top legislative achievements.
Two years on, it’s clear the law did indeed boost GDP growth—but for only a short period.
“We saw a short-term boost to output and investment that really seems to have largely dissipated. GDP is growing more slowly and investment is actually shrinking over the past two quarters,” said Ben Page, an economist at the non-partisan Urban-Brookings Tax Policy Center. “There’s almost no evidence for a big inflow of foreign capital.”
In the meantime, the government now estimates it will lose $600 billion more in tax revenues than it initially thought, bringing the cut’s total cost to $1.6 trillion. Boosting the deficit while the economy is growing and at a late stage in its cycle is irresponsible, Page argues. “Usually at the peak of the economic cycle, that should be when deficits are at their lowest,” he said. “The economy is not going to grow forever, and at that point deficits will boom…stimulus policy will be needed. That’s one of the worries about running those deficits when times are relatively good.”
Despite what the Democrats claimed, most people did actually pay less tax. But the wealthy got a far bigger cut than the rest of society, according to various studies. Next year, the richest 20% of taxpayers will save more than double the amount of taxes than the remaining 80% of earners combined—and the top 1% have cut their tax bills by an average of $49,950, according to calculations by the left-leaning Institute on Taxation and Economic Policy (ITEP).
“The tax law has made rich people richer, it’s made some foreign investors richer, and it hasn’t really accomplished very much else,” said Steve Wamhoff, ITEP’s director of federal tax policy. “I think this is the exact opposite of what our society needed in this time of greater inequality.”
Big companies are having a field day—with FedEx coming to exemplify corporate America’s response to the cut. The firm’s CEO lobbied hard for the bill on the premise that mass investment by businesses would follow. It then became one of 91 companies, including Amazon and IBM, whose effective tax rates dropped to zero in 2018—in Fedex’s case, from 34% the year before. The company then cut its capital spending in both 2018 and 2019, according to the New York Times. Instead of ploughing their extra cash in infrastructure or productivity, big businesses have handed it back to investors through share buybacks.
Even more complex
Even those who argued for a big cut are struggling to find enthusiasm for the law. “I don’t think I’m disappointed—I’m just saying don’t give up on the TCJA just yet,” said Aparna Mathur, an economist at the conservative American Enterprise Institute. She argued it could take 5 to 7 years before seeing its full effects and said growth might have been slowed by uncertainty surrounding the US trade war with China.
While Mathur still believes a big business tax cut with incentives for investment was good economic policy, she says she is frustrated with the complexity of the law the Republicans passed. That complexity, she argues, is part of the reason there’s been less investment than expected: Businesses are perhaps holding onto the extra cash until the new tax law’s full impact on them becomes clearer.
“It’s a massive, massive bill. We still have regulations coming out—the Treasury is still providing guidance,” she said. “The way all of us were viewing the tax bill before was that it would be a simpler bill in the sense that it had a massive rate cut and some minor changes on the individual side. Now it seems that there’s so much more to tease out.”
Despite Trump’s promise of a simpler filing season under his bill, taxpayers have had a rougher time since it passed. “Taxpayers spent about eight billion hours on tax compliance in 2019 (compared with about six billion hours in 2016),” wrote Omri Marian, a tax law professor at the University of California, Irvine. While Trump did fulfill his trademark promise of making the individual tax return fit onto a postcard, the new form is “less intuitive, and requires multiple other new forms to complete,” Marian wrote.
Still, one profession seems very happy with the new code’s complexity: accountants and tax lawyers. That’s not necessarily a good thing for the rest of the economy, Wamhoff argues: The TCJA “has created a new cottage industry for lawyers to game the system.”