Catherine Rampell: One year later, what has the tax cut delivered?
Happy first birthday, GOP tax cuts.
Normally we don’t expect much of 1-year-olds. This kiddo’s parents, however, had high hopes — promises, you might say — for the Tax Cuts and Jobs Act: It would reduce deficits, supercharge the economy (and stocks and wages), and draw droves of grateful voters to the Republican Party.
So where do those promises stand?
The White House says things are working as planned. The numbers mostly suggest otherwise.
Consider the budgetary impact. Republicans said the bill would pay for itself, contra every independent forecaster. Congress’s official scorekeepers, the Joint Committee on Taxation and the Congressional Budget Office, initially pegged the 10-year cost at $1.5 trillion; later they raised that to about $1.9 trillion.
The actual numbers thus far don’t look so hot. Despite some initial bogus claims from the administration that the deficit was “coming down rapidly,” it’s on track to rise from $666 billion in 2017 to $970 billion this year, according to the Committee for a Responsible Federal Budget. That puts it at about 4.6 percent of gross domestic product, virtually unprecedented in such strong economic conditions.
Usually, when the economy is doing well — and we’re not in a major war — tax revenue is strong, spending on programs such as food stamps and unemployment falls, and the budget gap narrows. In fact, the last time the unemployment rate hovered around 4 percent, we had a surplus.
Supporters of the tax overhaul sometimes say it’s still too early to judge the fiscal impact, that the law will still pay for itself over the long term.
In a call with reporters Wednesday, though, White House Council of Economic Advisers Chairman Kevin Hassett ducked a question about whether this was the case. He said that the administration was still “re-running the 10-year numbers,” which will be out in February with the president’s budget. He added that “if you get the growth that we see this year, and if that continues, then the revenue feedback effects become enormous as you go out to the end of the period.”
And that brings us to the next big promise about the tax cut: that it would unleash unfathomable, sustainable economic growth.
It’s true that GDP growth is up this year — to about 3 percent — after averaging 2.2 percent over the previous five years. That’s largely due, though, to the fact that the tax cuts (alongside spending hikes) provided an enormous fiscal stimulus.
Again, every independent outside forecast suggests that the impact of that stimulus will fade in the next year or so, with the economy reverting to more or less the growth path we were on before this expensive legislation was passed. In fact, in its forecast released Wednesday, the Federal Reserve downgraded its growth estimate for 2019 to 2.3 percent. (It forecasts the long-term growth rate at 1.9 percent.)
Other, more specific predictions from the White House have also not come to fruition.
Trump said that “at least $4 trillion” would be repatriated to the United States. So far we’ve seen just over a half-trillion dollars come back.
Business investment spiked immediately after the cut but slowed last quarter.
The stock market boomed initially, true. (More recently, stocks have fallen, thanks to other factors, such as the U.S.-China trade war.) This makes sense, since stocks are just claims on the after-tax profits of a firm. With lower tax rates, pretty much by definition stock prices should rise. Firms have also used their tax windfall for share buybacks, which further buoy stocks, and a record $1.1 trillion of buybacks has been announced this year.
What the typical American probably cares about more is raises, which were promised in spades.
Big, above-trend raises were supposed to come in the short term because cuts would allegedly free up more money for raises (not buybacks), and in the long term because firms would invest in new capital equipment that would ultimately boost worker productivity. Inflation-adjusted wages have continued trudging upward, but so far we’ve seen no obvious break in the trend. At just a year in, not enough time has passed to judge the more optimistic forecasts for that longer-term mechanism — sometimes called “capital deepening” — but the recent slowdown in business investment is inauspicious.
Which brings me to the last promise: the politics of the tax cuts.
Approval ratings of the law remain underwater, perhaps because two-thirds of the benefits of the law went to the top income quintile this year. By 2027, according to the Tax Policy Center, most Americans will see a tax increase, thanks to the sunsetting of nearly all tax cuts for individuals. Unsurprisingly, the law didn’t exactly produce the “red wave” its proponents hoped for.
Sure, maybe that’ll change. Maybe. At least that’s what we normally tell those celebrating birthdays: Close your eyes, and make a wish.