What did Trump’s tax cuts do?

Seven years ago, when Republicans passed the most important overhaul of the tax code in a generation, they were certain the legislation would boost investment, raise wages and transform the economy. the United States to become a higher instrument.

So did it?

The answer, at least for now, is lost in history.

The pandemic and inflation rocked the global economy soon after the law was passed in 2017, disrupting the data that analysts often rely on to draw conclusions about whether tax cuts have helped the economy in the way Republicans promised.

As a result, policymakers in Washington now rely on only a partial understanding of the law’s past as it weighs about 5 trillion dollars to continue.

“Basically, starting in 2020 the data is kind of useless,” said Alan Auerbach, an economics professor at the University of California, Berkeley, who counts Kevin Hassett. , a senior economic adviser to President-elect Donald J. Trump, is among his former students. .

Economists focused on just two years before the coronavirus pandemic, 2018 and 2019, to measure the effects of the law on the world’s most important economy. But that’s a limited window in trying to figure out whether the tax cuts have triggered a cycle of investment and growth that could last for years.

“If you’re looking at the long-term results, it’s just a miss,” said Mr. Auerbach. “There is no way to control the impact of Covid.”

It’s not all mystery about the 2017 tax law. The law lowered the marginal tax rate for nearly every category of individual income, created a bigger deduction and extended child loans. For businesses, the law cut the corporate rate to 21 percent from 35 percent, temporarily spurred new capital investment, reformed the overseas income tax. sea ​​and offered a new discount for small business owners.

For Republicans, who passed the Democratic Unification Act in the first year of Mr. Trump’s first term, these changes represented an unqualified economic success. They attributed the tax cuts to strong growth and wage growth in the years before the pandemic, warning that allowing most of the cuts to expire in 2017, which scheduled to happen at the end of the year, will cause economic turmoil.

“We saw the power of these tax cuts in ’18, ’19 and went into January ’20 before they cut Covid, and the great success we had,” Scott Bessent, the choice of mr. Trump to lead the Treasury Department. , he said during the Senate confirmation hearing on Thursday. “If we don’t innovate and expand, we will face economic disaster.”

Economists are more cautious. Trying to figure out the role of a single factor in an expanding economy shaped by changes in interest rates, oil prices and dozens of other variables is a difficult task. Economists provide some research on the impact of tax cuts on the economy only through well-constructed models.

They generally view individual tax cuts as having no effect on the economy as a whole, despite their popularity. Economic research suggests that lower tax rates do not encourage people to work more, which would boost growth, and that Americans’ incomes from lower taxes are not affected. the economy in a sustainable manner as well. So some of the most expensive parts of the 2017 law — the lower individual rate and larger standard deduction — are the most important to the economy.

“If you look at the results of various tax reforms, you’ll see that individual tax cuts don’t increase growth as much as investment targets,” said Erica York, vice president of federal tax policy. at the Tax Foundation, a think tank that generally favors lower taxes.

This allows most experts to focus on reducing corporate taxes included in the 2017 law. The economic theory in the book says that lower taxes make companies more profitable. to invest more in their businesses, which helps to make workers more productive, raises wages and overall economic prospects.

In a paper last year, a team of researchers from Harvard, Princeton and the University of Chicago examined several different ways to measure the response of businesses to tax cuts. Despite some of the scattered data, academics have concluded that lower corporate taxes have actually helped to encourage more investment.

The team then used the so-called “back of the envelope” model developed by Eric Zwick, an economist at the University of Chicago and one of the paper’s authors, to analyze the impact of the investment. higher credit for the performance of the entire economy. They estimated that the law would help the economy become 1 percent larger over 10 years, an increase that equated to about $750 in wages for each American worker. Such an increase would still be a far cry from the $4,000 per worker that the White House originally promised Mr. Trump in corporate tax cuts.

Mr Zwick said he was confident in the general conclusions of his research, although he acknowledged the additional challenge of understanding the long-term economic impact from the two non-Covid data. only years.

“It’s not right,” he said. “Having at least five years of data was very helpful in thinking about dynamic products.”

The research by Mr. Zwick and his colleagues has thrown cold water on Republicans’ insistence that the tax paid for itself. Despite the additional growth that Mr. Zwick and his co-authors found, they argued that lower corporate taxes cost the US government billions. Estimates at the time the 2017 law was passed found it would add $1.5 trillion to the deficit over 10 years.

Republicans have long argued that lower tax rates would generate so much economic activity that the government would collect as much revenue as it did before they cut taxes. They recently cited higher-than-expected tax revenues in the post-pandemic years as evidence of the effectiveness of tax cuts.

Apparently in response, the non-partisan Congressional Budget Office explained in a recent release that most of the tax revenue is the result of inflation driving up prices and incomes. .

Other analysts found that the benefits of the tax cuts went mostly to the wealthy. A study by economists at the International Committee on Taxation and the Federal Reserve looked at the immediate response of businesses to tax cuts, and found that workers saw an increase in income. -higher income as a result. But those raises went entirely to the people who were already the most productive in their companies, and 90 percent of workers saw no benefits, the researchers said.

The research highlights the fact that individual income tax cuts, while affecting many Americans, tend to benefit the wealthy, who pay the most. the taxes of the country.

“We know it did two things: It increased the deficit, and it redistributed resources to the rich,” said Bill Gale, associate director of the Tax Policy Center, a law think tank. on taxes 2017. “What’s more difficult to determine is how much the investment will increase and how that will affect wages.”