Tax Cuts A Year Later – Did They Deliver As Promised?

Leading up to and following the passage of the Tax Cuts and Jobs Act (Trump Tax Cuts) I wrote a lot of analysis on the fallacy of tax cuts, why tax cuts wouldn’t change corporate behavior, and why tax cuts are an ineffective method of improving economic growth.

I received a lot of push back on my views then the “mainstream” analysis was the tax cuts would jump start economic growth. Of course, with 2017’s Q1 economic growth coming in at a meager 0.7% annualized, it would certainly seem to be needed. But as I questioned then:

“Do tax reductions lead to higher economic growth, employment and incomes over the long-term as promised?”

Speaking to NBC’s Meet the Press, VP Mike Pence argued at the time he was confident that eventually, the deficit would decline as it would be overcome by surging economic “growth” thanks to the tax cuts it will fund.

As I wrote then, such was unlikely to be the case due to fact that tax-rate reductions are quickly absorbed into the economy. For example:

    • Year 1: GDP = $1 Trillion 
    • Taxes Are Reduced Which Puts $100 Billion Into The Economy.
    • Year 2: GDP = $1 Trillion + $100 Billion = $1.1 Trillion or 10% GDP Growth
      • Going Into Year-3 There Are No New Tax Cuts And All Spending From Previous Year Remains
    • Year 3: GDP = $1.1 Trillion + $0 = $1.1 Trillion or 0% GDP Growth

As shown in the chart below, changes to tax rates have a very limited impact on economic growth over the longer term.

Furthermore, it was believed that tax cuts would lead to a boom in employment. The chart below shows the corporate tax rate versus employment back to 1946. Corporate tax levels create employment change at the margin. If you look at the chart you will notice that when corporate tax rates are reduced employment did marginally increase but only for a short period of time. The problem for the “Trump Tax Cuts” is that they were introduced at a time when the economy was already running near full employment. Not surprisingly, the change to employment over the last year has been minimal tied primarily to population growth.

What drives employment is sustainable economic growth that leads to higher wages, increased aggregate demand and higher rates of production. In other words, employment adjusts over time to respond to the strength and direction of the economy rather than the movements in tax rates. The chart below shows economic growth versus employment. 

Do not misunderstand me. Tax rates CAN make a difference in the short run when coming out of a recession as it frees up capital for productive investment at a time when recovering economic growth and pent-up demand require it. However, as I stated previously, given the economy was already growing near maximum capacity, the boost from tax cuts was mostly mitigated.

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Gary Anderson 3 weeks ago Contributor's comment

Marco Rubio and Pence were deceived. In order for the tax cuts to work, they would have had to included mandated investment. That isn't socialism, just common sense. Don't want to do that, then don't steal from the nation with tax cuts for the wealthy!