Less than a week after Treasury Secretary Mnuchin repeated the fanciful claim that the Trump tax cuts of 2017 would pay for themselves, the non-partisan Congressional Budget Office (CBO) proved him wrong. If tax cuts actually paid for themselves, they would reduce deficits based on faster revenue growth that comes from faster economic growth. Deficits immediately shot up after the 2017 supply-side tax cuts. And CBO forecasts that those deficits will continue to stay high for the foreseeable future. This is the opposite of tax cuts paying for themselves.
CBO released its regular update to the economic and budget outlook on January 28. The new estimates show a deficit of $1 trillion for 2020. This is the equivalent of 4.6% of gross domestic product. The federal budget deficit will grow to 5.4% of GDP by 2030, according to GDP.
This is a much worse outlook for the current deficit than CBO showed just before Congress passed the Trump tax cuts. In June 2017, CBO anticipated a deficit of 3.6% of GDP for 2020. The current deficit is thus 27.8% greater than CBO projected before the tax cuts. Moreover, this one percentage point difference in the current projected deficit and the prior projection equals $221 billion for 2020. This is a substantial gap that follows in large part from the tax cuts, especially since the economy continued to grow during this time.
A temporarily larger deficit may be worth it, especially in a world of very low interest rates, if it translates into faster economic growth. But that is not what has happened. Economic growth increased briefly in early 2018 but quickly fell back to or even below the modest levels that persisted before the 2017 tax cuts (see figure below). Not all deficits are bad, but the ones from the supply-side tax cuts have proven to be.
Congress enacted the trickle-down tax cuts, known as the Tax Cuts and Jobs Act, in December 2017, aimed at accelerating growth. The argument in favor of these cuts went something like this: Giving corporations a lot more money and showering the richest households would give them more cash to invest. This would lower the cost of investing and spark a boom in investments in new manufacturing plants, office buildings, vehicle fleets and energy upgrades, among other things. These new investments would translate into faster productivity growth, higher economic growth and stronger wage and employment gains. That was at least the argument for selling lopsided tax cuts for the biggest winners in the current economy.
But the first step in this chain — faster business investment growth — never happened. This should not have been surprising. Corporations were already profitable and sat on piles of cash in 2017. The richest households had also reaped the benefits of the economic expansion since 2009. And interest rates were very low. Yet none of these factors were enough to spark an investment boom. Those looking for cheap money for their investments didn’t have to look far. The problem was that there weren’t enough companies looking to invest.
Other factors likely held back investments. Most notably, incomes have grown only slowly, households face increasing costs for health care, housing and education and continue to be burdened by massive amounts of consumer debt. There was and still is no reason for firms to invest in more capacity to make more stuff since they know consumers are maxed out and can’t by the additional things.
This has important implications for using the federal purse to boost economic growth. Rather than wasting the money on trickle-down tax cuts, Congress could have spent the money on badly needed infrastructure improvements, on making education and health care more affordable and on greening the economy, to name just some of the bigger ideas. The result would have been direct income and job gains for American workers. Families would have gotten help with necessary yet costly items such as health care and education. And the cost of doing business for all companies would have been lower, not just for large cash-rich corporations. Both the economy and workers would have won. Investing in people and the country instead of wasting money on the lucky few actually works.
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