FacebookTwitterGoogle+RedditEmail

The Trump Tax Cut is Even Worse Than They Say

Jim Tankersley had a nice piece in the New York Times last week pointing out that the tax cut pushed through by the Republicans in 2017 is leading to a sharp drop in tax revenue. While this was widely predicted by most analysts, it goes against the Trump administration’s claims that the tax cut would pay for itself.

Looking at full year data for calendar year 2018, Tankersley points out that revenue was $183 billion (5.6 percent) below what the Congressional Budget Office (CBO) had projected for the year before the tax cut was passed into law. This is a substantial falloff in revenue by any standard, but there are two reasons the picture is even worse than this falloff implies.

The first is that we actually did see a jump in growth in 2018 pretty much in line with what the Trump administration predicted. The tax cut really did stimulate the economy. It put a lot of money in the economy (mostly going to those at the top) and people spent much of this money. The result was that the growth rate accelerated from around 2.0 percent the prior three years to over 3.0 percent in 2018. (We don’t have 4th quarter data yet, which may be delayed by the shutdown, but growth should be over 3.0 percent.)

The jump in growth in 2018 means that the drop in revenue was not due to the economy being weaker than expected, it was due to the fact that the tax rate had fallen by a larger amount than the boost to growth. In fairness to the Trump administration, they had also projected a falloff in revenue due to the tax cut in 2018, but not one that was as large as what we saw.

This gets to the second issue, the source of the revenue shortfall. If we look at the projections from CBO, by far the largest gap between its post-tax cut projections and actual revenue was in corporate income taxes. CBO had projected that the government would get $230 billion from the corporate income tax in fiscal year 2018. It actually collected just $205 billion, a gap of 12.3 percent. This is a substantial shortfall in revenue, especially since this is for the 2018 fiscal year, which ended September 30th. The tax cut was only in effect for nine months of the fiscal year.

The shortfall in revenue from the corporate income tax means, in effect, that the Republicans gave a larger tax cut to corporations than was generally realized at the time. And, since shares of stock are overwhelmingly held by those at the top, this means a bigger tax cut for the rich than advertised.

There is another aspect of this revenue shortfall that is also really bad news. One of the claimed benefits of the tax cut was that it would reduce the amount of tax gaming that corporations do to avoid or evade their taxes. The argument is that we would have a lower tax rate, but with fewer loopholes. This meant that companies would not waste resources trying to get out of paying their taxes and the government could count on getting something closer to the tax rate set in law. (Few companies paid anything close to the old 35 percent tax rate.)

However, the revenue data for 2018 strongly suggest that companies are still putting considerable effort into avoiding their tax liabilities. Apparently there are still plenty of loopholes that allow them to pay less than the statutory rate. This means that while we did lower tax rates, we did not remove the incentive/opportunity for tax gaming.

As a sidebar, if anyone in Washington ever does develop an interest in preventing tax avoidance/evasion, we do know how to do it. We just require companies to give the government non-voting shares in proportion to the tax rate. For example, if the targeted tax rate is 25 percent we require companies to turn over non-voting shares equal to 25 percent of outstanding shares. These shares would give the government no control over the corporation, but they would be entitled to the same dividends of share buybacks as voting shares. This means that there is no way for the company to escape its tax liability unless it also rips off its shareholders.

These budget numbers are not a big deal for 2018. As I’ve said in the past, it was actually a good thing to see a larger deficit, since the more rapid growth lead to a reduction in the unemployment rate to levels not seen in almost 50 years. It would have been better if the money was used for education, infrastructure, child care or other areas where the benefits would be shared by those at the middle and the bottom.

But, the drop in the unemployment rate means hundreds of thousands more people are working, with the jobs disproportionately going to the most disadvantaged segments of the labor market. Low unemployment has also allowed those at the middle and bottom of the wage ladder to see gains in real wages. And, the low unemployment rate we have seen in the last year set a new benchmark. We now know that the economy can get to an unemployment rate under 4.0 percent without spiraling inflation. Just a few years ago most economists would have argued that unemployment below 5.0 percent would send inflation spiraling.

So, these are positives from the boost in demand from the tax cut, but getting back to the revenue shortfall story, the picture is likely to be worse in future years. As I said earlier, the problem in 2018 was not a lack of growth, the economy had a good year, but revenues still fell. In future years, growth is likely to be a problem.

The Trump administration’s revenue projections assumed that growth would average close to 3.0 percent for the next decade. It did hit this target in 2018, but growth is likely to fall back to near 2.0 in 2019 and subsequent years. The tax cut put money in people’s pockets, which they largely spent. But the one-time boost from a lower tax rate is rapidly coming to an end. If growth falls back to its pre-tax cut trend, as had been projected by CBO, then revenue will be far lower than the Trump administration has projected and the deficit will be correspondingly larger.

The promise of course was that the tax cut would lead to an investment boom. This would lead to more rapid productivity growth. The gains from higher productivity growth would be based in higher wages, leaving workers far better off as a result of the tax cut.

To this point there is essentially zero evidence of the promised investment boom. There was respectable growth in investment in the first two quarters of 2018, but growth slowed to just 1.1 percent in the third quarter. It is likely to be even weaker in the fourth quarter due to the drop in world oil prices (less oil drilling), although we won’t get these data until the shutdown is over. In any case, there is zero evidence that the tax cut is leading to the sort of investment boom that will qualitatively boost the rate of productivity and GDP growth and provide workers with substantially higher pay.

In this context, the deficits from the Trump tax cut are a problem. If the economy is bumping up against its limits and the labor market is close to full employment, it means a much larger share of output is going to the consumption of the wealthy. That both means less private consumption for everyone else, and it makes it more difficult to have major initiatives that involve substantial spending, such as a Green New Deal or Medicare for All.

The long and short is that the revenue data for 2018 looks pretty bad on its face. It looks even worse on a closer examination.

This article originally appeared on Dean Baker’s blog.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
February 15, 2019
Friday - Sunday
Matthew Hoh
Time for Peace in Afghanistan and an End to the Lies
Chris Floyd
Pence and the Benjamins: An Eternity of Anti-Semitism
Rob Urie
The Green New Deal, Capitalism and the State
Jim Kavanagh
The Siege of Venezuela and the Travails of Empire
Paul Street
Someone Needs to Teach These As$#oles a Lesson
Andrew Levine
World Historical Donald: Unwitting and Unwilling Author of The Green New Deal
Jeffrey St. Clair
Roaming Charges: Third Rail-Roaded
Eric Draitser
Impacts of Exploding US Oil Production on Climate and Foreign Policy
Ron Jacobs
Maduro, Guaidó and American Exceptionalism
John Laforge
Nuclear Power Can’t Survive, Much Less Slow Climate Disruption
Joyce Nelson
Venezuela & The Mighty Wurlitzer
Jonathan Cook
In Hebron, Israel Removes the Last Restraint on Its Settlers’ Reign of Terror
Ramzy Baroud
Enough Western Meddling and Interventions: Let the Venezuelan People Decide
Robert Fantina
Congress, Israel and the Politics of “Righteous Indignation”
Dave Lindorff
Using Students, Teachers, Journalists and other Professionals as Spies Puts Everyone in Jeopardy
Kathy Kelly
What it Really Takes to Secure Peace in Afghanistan
Brian Cloughley
In Libya, “We Came, We Saw, He Died.” Now, Maduro?
Nicky Reid
The Councils Before Maduro!
Gary Leupp
“It’s All About the Benjamins, Baby”
Jon Rynn
What a Green New Deal Should Look Like: Filling in the Details
David Swanson
Will the U.S. Senate Let the People of Yemen Live?
Dana E. Abizaid
On Candace Owens’s Praise of Hitler
Raouf Halaby
‘Tiz Kosher for Elected Jewish U.S. Officials to Malign
Rev. William Alberts
Trump’s Deceitful God-Talk at the Annual National Prayer Breakfast
W. T. Whitney
Caribbean Crosswinds: Revolutionary Turmoil and Social Change 
ADRIAN KUZMINSKI
Avoiding Authoritarian Socialism
Howard Lisnoff
Anti-Semitism, Racism, and Anti-immigrant Hate
Ralph Nader
The Realized Temptations of NPR and PBS
Cindy Garcia
Trump Pledged to Protect Families, Then He Deported My Husband
Thomas Knapp
Judicial Secrecy: Where Justice Goes to Die
Louis Proyect
The Revolutionary Films of Raymundo Gleyzer
Sarah Anderson
If You Hate Campaign Season, Blame Money in Politics
Victor Grossman
Contrary Creatures
Tamara Pearson
Children Battling Unhealthy Body Images Need a Different Narrative About Beauty
Peter Knutson
The Salmon Wars in the Pacific Northwest: Banning the Rough Customer
Binoy Kampmark
Means of Control: Russia’s Attempt to Hive Off the Internet
Robert Koehler
The Music That’s in All of Us
Norah Vawter
The Kids Might Save Us
Tracey L. Rogers
Freedom for All Begins With Freedom for the Most Marginalized
Paul Armentano
Marijuana Can Help Fight Opioid Abuse
Tom Clifford
Britain’s Return to the South China Sea
Graham Peebles
Young People Lead the Charge to Change the World
Matthew Stevenson
A Pacific Odyssey: Around General MacArthur’s Manila Stage Set
B. R. Gowani
Starbucks Guy Comes Out to Preserve Billionaire Species
David Yearsley
Bogart Weather
FacebookTwitterGoogle+RedditEmail