4 Lessons from the Tax Cuts and Jobs Act So Far
Most tax experts agree that it’s too soon to make any final conclusions about the Tax Cuts and Jobs Act, which has been in effect for less than two years and contains provisions that seek to influence business investment over a fairly long time horizon. Nonetheless, a handful of recent analyses suggests the law has been something of a disappointment so far and that many of the claims made about it by Republican lawmakers and the Trump administration were overblown.
Here’s a roundup of reviews and comments from this week:
Possible improvements for multinational corporations, but a lot of hype, too: Writing as part of a series sponsored by the American Enterprise Institute, Kyle Pomerleau of the conservative Tax Foundation says that while the TCJA took some much-needed steps toward improving the international provisions of the tax code, the economic results aren’t in yet, so it’s hard to say what impact those changes are having.
The TCJA may have reduced the motivation of U.S. corporations to invert, or move their headquarters out of the country, Pomerleau says, but the law is somewhat contradictory in that regard, and includes features that may push some firms to move elsewhere. Similarly, the law included provisions that may reduce the gains for firms that shift profits to overseas subsidiaries, but other provisions may make such a move more attractive.
One thing that is clear, according to Pomerleau, is that one of the biggest promised payoffs touted by the bill’s supporters — a massive influx of job-creating money held by U.S. firms abroad — was almost certainly oversold. Pomerleau writes:
“President Trump argued that the repatriation provision would encourage companies to bring back trillions of dollars that were locked overseas to invest in the United States and create jobs. Unfortunately, there was no reason to expect that repatriation would lead to increased domestic investment. Deemed repatriation represented a retroactive change in policy and didn’t change investment incentives going forward.”
Moving to the new international tax system “is unlikely to boost investment” domestically, Pomerleau adds.
Few benefits for workers: The GOP tax cuts are “not trickling down” to ordinary workers, according to Galen Hendricks, Seth Hanlon and Michael Madowitz of the liberal Center for American Progress. The Trump administration promised wage increases of at least $4,000 a year, and as much $9,000, but that bonanza is nowhere to be seen, they say, and few expect to see it any time soon. In addition, the much-ballyhooed bonus payments given to workers after the tax bill was signed in late 2017 were largely illusory, they argue, citing an analysis by the non-partisan Tax Policy Center.
“While the effects of a very large tax overhaul will take years to fully develop and analyze, the evidence from the first two years suggests that corporate tax cuts are draining revenue from the U.S. Treasury while doing little that would ultimately benefit U.S. workers,” the authors write. “Instead of trickling down to workers, the 2017 tax cuts have largely served to line the pockets of already wealthy investors—further increasing inequality—with little to show for it.”
Tax cuts don’t reduce the deficit: The liberal advocacy group Americans for Tax Fairness tweaks Treasury Secretary Steven Mnuchin for his claim back in 2017 that the TCJA would “cut down the deficits by a trillion dollars.” Rather than falling, deficits are rising rapidly and are expected to top $1 trillion next year, with the tax cuts playing a significant role in the revenue shortfall.
“Mnuchin’s prediction was off by $1 trillion,” says Frank Clemente, executive director of Americans for Tax Fairness.
But the TCJA sure was good for corporate profits: Aaron Sojourner, an economist at the University of Minnesota who served on the Council of Economic Advisers for Presidents Obama and Trump, says after-tax corporate profits rose 8.8% in the wake of the TCJA, and have remained at roughly that level ever since. Pre-tax profits rose by less than half that amount, Sojourner says, indicating that the TCJA provided an enormous windfall to company owners, without requiring any change in their behaviors.