This month marks the two-year anniversary of President Trump’s major legislative accomplishment: his rewrite of the tax code. As we head into the election year, you can bet that taxes and the economy will be topics of debate. President Trump will, no doubt, want voters to give him credit for his tax law, which he promised would lead to more investment, more jobs, higher wages and faster growth.
But none of those promises have been fulfilled. From a purely economic standpoint, the Tax Cuts and Jobs Act of 2017 has been an enormous flop.
Let’s start with jobs. Has the Tax Cuts and Jobs Act created millions of new jobs, as was promised? In a word, no. In the four years prior to the passage of the GOP tax law, the economy added an average of 213,000 jobs each month, according to data from the US Bureau of Labor Statistics. In the nearly two years since the law passed, average job creation has actually declined by an average of 11,000 per month.
The White House promised that the tax cuts would result in an annual wage increase of $4,000 per household. Again, not even close. In the two years since the law passed, wage growth, after accounting for inflation, rose only slightly, from 1% to just under 1.4% per year for nonsupervisory workers, according to data from the US Bureau of Labor Statistics. That difference — even if it were fully attributable to the tax cuts — amounts to less than $400 for a full-time worker. So much for your $4,000 raise.
We have been told, over and over again, that tax cuts for the rich are good for the overall economy. However, there’s not much solace to be found in gross domestic product either. In the four years before the law passed, real GDP grew by an annual average rateof about 2.4%, according to data from the Bureau of Economic Analysis. In the nearly two years since, the GDP growth rate has inched only slightly higher to an annual average of 2.5%.
These lackluster results should not, in the end, be very surprising. The claim that a huge tax cut for the wealthy and corporations would trickle down to everyone else was based on an outdated and discredited set of ideas for how the economy works. In that old framework, the way to produce a better economy is to get out of the way of job creators and let the free market do the rest. A tax cut for corporations, then, should have reduced the cost of capital and induced them to invest more, which ultimately is supposed to create jobs and push up wages.
But even that very first step never happened. In the last two years, the growth rate of private direct investment has substantially declined. In the four years before the law passed, private direct investment grew by about 3.3% annually, according to data compiled by the Federal Reserve Bank of St. Louis. In the two years since the law was enacted, that rate is down to 2.5%.
The idea that tax cuts aimed at corporations and the rich would bestow economic gifts on all of us is flawed. Because that’s not how the economy works in real life. Corporations don’t make investment decisions based on tax giveaways. And wages don’t automatically increase with tax cuts or with productivity improvements.
President Trump’s signature legislative accomplishment has turned out to be an expensive failure. He will run on his economic record next year, but he should be careful what he wishes for. Given what a bust his tax cuts have been, voters may not be as inclined to trust his economic stewardship.