Kevin Drum Evaluates the Trump Tax Cuts

 

    

I usually review only scholarly books and articles on this website. However, every now and then a journalist comes along who just nails a social issue. Kevin Drum has done that in his “Death and Taxes”, pp. 27-31 in the July-August 2020 Mother Jones.

    

Readers of this website know my position on taxation. I have long argued that governments are essential to economic growth and basic societal survival. Without adequate funding, they can not do their job and the economy suffers horrendously. I have also argued that tax cuts produce almost no short-term increase in employment or economic growth while the long term reduction in government fiscal capacity that comes from tax cuts produces long term decreases in employment and economic growth.

    

Readers looking for those arguments can find them in

 

Tax Revolt: How the Conservative Middle Class Became a Serious Problem for Capitalism

Why Tax Cuts Do Not Create Jobs

Why Tax Cuts Don’t Matter to Brazilian Barbers

The Declining Tax Capacity of the United States Government

Reinsberg Team Shows Shrinking Government Increases Corruption and Incompetence

   

Those articles are nice in their own way. (After all, they are by my favorite author). However, they do have the liability of talking about earlier tax cuts from the Bush era and before. The Trump tax cuts were massive – the effects of them have not been analyzed.

   

Enter Kevin Drum who has done an outstanding job of looking at the economic consequences of the Trump tax cuts. He looks at a substantial number of effects. His statistical data are good. The conclusions are grim. With two narrow exceptions, the tax cuts had no positive effects on economic growth. Depending on what indicator you look at, either government capacity was gutted for no gain at all, or for something that made the economy worse.

    

Here are what Kevin Drum’s numbers show:

1. The tax cuts were supposed to increase business investment. New orders for capital goods and overall business investment declined after the Trump tax cut.

 

2. The tax cuts were supposed to increase GDP growth. They did go up for two quarters after the cuts.  GDP went down consistently after that. Since tax cuts are supposed to take a while to work (firms have to make investments which increase productivity which produces growth), the longer term data are a more realistic assessment of the effects of the cuts.

 

3. Tax cuts were supposed to pay for themselves, since the greater economic growth would produce more wealth to tax. Obviously, since the economy did not grow, there was no extra wealth to tax. The federal deficit increased instead of decreasing.

 

4. Corporations were supposed to bring back profits stashed overseas, since those profits would no longer be taxed at “high” American rates. The Trump tax cut did work as far as bringing back profits from overseas. A lot of money returned immediately after the tax cut was passed. The amount dropped off after that but the return of income at the beginning was substantial. That money was not invested in capital goods or straight up business investment. Much of it went into share buybacks. But the money did come home.

 

5. Wages were supposed to go up once companies had more money with which to pay workers. Wages did rise, but at the same rate they had been rising before the tax cut. The best assessment here is that the tax cuts had no effect in raising wages.

 

6. Employment was supposed to go up once companies had more money with which to pay workers. Employment did rise, but at the same rate it had been rising before the tax cut. The best assessment here is that the tax cuts had no effect in creating jobs. (Isn’t it funny how the results for both wages and employment were virtually identical? And isn’t it funny how these were the two items that would be the primary benefits for the working class, the middle class and the general voting public as a whole?) Regular Americans got almost no benefit from the Trump tax cut.

7. Corporate profits were supposed to go up since companies were paying fewer taxes. This did occur. Profits rose substantially as a result of the tax cuts. This was excellent news for shareholders and for executives whose bonuses depended on short term profitability. Those executives all got performance bonuses even though the performance in this case had nothing to do with their talents, decisions or actions. Note that because there was no effect on economic growth, employment or wages, American society as a whole got very little benefit from these increased profits.

 

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Overall, Drum’s analysis dovetails with my own arguments and research on taxes and economic growth. What matters is investment in infrastructure, investment in science, investment in education and the maintenance of a strong foreign policy and geopolitical strength.

 

It is also worth noting that what happened with the Trump tax cut is exactly the same as what happened with the two Bush tax cuts. Past history should have been a guide to whether we wanted to repeat the Bush mistakes.

 

To paraphrase George Santayana:

Those Who Forget the Lessons of History Are Condemned to Repeat Them