By far, the largest chunk of the tax cut that President Trump pushed through Congress in 2017 was slashing the corporate tax rate from 35 percent to 21 percent. This was justified in part by the idea that the lower tax rate would go along with an elimination of loopholes.
By closing loopholes, revenues collected would be something closer to the legislated tax rate. It also would reduce the resources wasted in tax avoidance. The other justification for the lower tax rate was that it would lead to an investment boom. This was the basis for the claim that the growth from the tax cut would allow it to pay for itself. More rapid growth was supposed to lead to higher tax revenue, more than offsetting the reduction in revenue from the tax cut.
It is now very clear that neither part of this story is true. While corporations are enjoying the benefit of lower tax rates, they continue to find ways to avoid paying the legislated rate. After the tax cut became law, the Congressional Budget Office (CBO) projected that corporations would pay $276 billion in taxes this year. This summer, the CBO lowered this projection to just $228 billion — a reduction of more than 17 percent.
It would have been nice if the tax cut had been successful in reducing avoidance, but the far more important issue was its impact on investment. By this measure, it has been an even bigger failure.
To have the impact on growth claimed by the Trump administration, we would need increases in investment in the neighborhood of 30 percent annually. Immediately after the tax cut, there was a modest upturn in investment, although it was still in the single digits. The tax cut may have contributed to this upturn, but the increase was no larger than we had seen in several prior years in the recovery.
As the most recent data indicate, even this modest increase has disappeared. Investment fell at a 3.0 percent annual rate in the third quarter, after declining at a 1.0 percent rate in the second quarter. Over the last year, investment has risen just 1.3 percent, less than the growth in the economy. This is not an investment boom.
To be fair, this is not just the failure of the tax cut. Trump’s trade war with China and other countries has led to an enormous amount of uncertainty in the economy. The problem is not simply that he is imposing tariffs; tariffs impose a cost on the economy, but the cost is generally less than the hype around them.
However, Trump’s tariffs are having a larger hit on investment because they are so erratically applied. He seems to take pleasure in threatening and removing tariffs like he is still running a reality TV show. Trump has repeatedly threatened large tariffs and then put off their imposition – or, alternatively, removed tariffs unexpectedly.
This is an environment that makes it very difficult for firms to plan investment. They don’t know what tariffs they are likely to face, both for the products they are selling and for their various inputs, many of which are now imported. In an extreme case, Trump has actually threatened to cut off trade with China altogether, a power he has under provisions for national security.
That sort of uncertainty makes companies put off investment until they can get a clearer view of the future. It’s also worth mentioning in this context that the trade war has not produced benefits in the form of a lower trade deficit. The trade deficit actually rose slightly in the third quarter, as it has throughout Trump’s term.
Trump’s failure on the trade deficit is also visible in manufacturing employment, which hit a record low as a share of total employment in October. This low was partially attributable to the United Auto Workers strike against General Motors. While the jobs lost due to this strike will be regained in November, the fact that we were hovering near a low is due to the weakness of manufacturing job growth under Trump.
The latest data on investment, GDP growth, the trade deficit and manufacturing employment all tell us the same thing. When it comes to producing gains for ordinary workers, Trump’s most-touted economic policies have failed badly. If the issue is giving more money to rich people, he’s doing just great.
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