GOP Tax Law Claims Are Not Evidence-Based

(Photo from npr.org is by Brendan Smialowski/Getty Images, and shows Republicans celebrating the passage of their new tax law.)

The Republicans made a lot of claims about their new tax cut law. They said it was a middle class tax cut. That was exposed as untrue, since over 80% of the tax cuts go to corporations and the richest Americans. Then they said the middle class would benefit because much of that money would trickle down to them in the form of higher wages and massive new job creation. Neither has happened. The truth is that the GOP's claims are specious, and not backed by evidence.

Here is part of an article on this by Josh Bivens and Hunter Blair at the Economic Policy Institute:

The TCJA is generally not defended on the grounds that it will boost demand. The reason why is clear: the tax cuts that make up the bulk of the TCJA—tax cuts for the rich and big corporations—are by far the weakest fiscal stimulus to aggregate demand. High-income households are more likely to save the money they receive from a tax cut than low- and moderate-income households. This means that much of the TCJA will end up as savings in the pockets of rich households rather than a boost to aggregate demand. Corporate tax cuts don’t rate any better on this core, for the same reasons. In the short run, the benefits of corporate tax cuts flow to shareholders. The top 1 percent owns 40 percent of total stocks. In short, corporate rate cuts are simply tax cuts for the rich by another name. Tax cuts for low- and middle-income households would have provided about three times as much bang for the buck as the TCJAs tax cuts for the rich and big corporations, as would have increases to income support programs or infrastructure spending.

All of this is why defense of the TCJA (and tax cuts for rich people generally) assume the economy is not demand-constrained and is already at full employment. In this case, the claim is that cuts to the corporate rate give companies higher after-tax profits with which they can pay dividends to shareholders. This increases corporations’ incentive to undertake investment in new plant and equipment. And because the increase in the post-tax return to capital owners’ savings induces households to save more (or attracts more savings from abroad), these desired new investments can be financed without being choked off by rising interest rates. The resulting increase in capital investment gives workers more and better tools to work with, which boosts labor productivity and eventually wages.

This all makes sense in theory, but as we’ve long detailed, the real-world  evidence doesn’t support that cuts to corporate income taxes will help typical American families. The reason for this in today’s economy is simple: post-tax returns to capital investment have been at historic highs for years now, yet capital investment lags. Increasing post-tax returns just does not seem to loosen any serious constraint on economic growth.

Even worse for the TCJA, however, is that the previous analysis assumes that these tax cuts to corporate income tax rates were paid for and do not add to the federal budget deficit. But as we all know now, the TCJA was not paid for. According to the Congressional Budget Office, the TCJA will add almost $1.9 trillion to deficits over 10 years. In the previous analysis, the boost to post-tax profit rates increased the incentive for private households to save, and this allowed new investments to be financed without pushing up interest rates. But for this to be true, it isn’t enough that just private savings increase—overall national savings must increase to keep interest rates from rising in the face of higher investment demand. The increase in federal budget deficits caused by the TCJA reduces public savings, and this would offset the effects of increased private savings. This means that if the economy genuinely is at full employment (as most TCJA proponents claim), then its failure to pay for the tax cuts will lead to higher interest rates that will choke off any investment incentive the TCJA provides.

There is simply no way to make a case that the TCJA was good economics relative to any plausible alternative. It has exceedingly low bang for the buck as a stimulus measure. Tax cuts that went disproportionately to low- and middle- income households, instead of to the rich and big corporations, or increases in government spending would have stimulated the economy by about three to five times as much.