CRS: 2017 Tax Law Proponents’ Trickle-Down Claims Haven’t Materialized

The 2017 tax law likely has had little effect on economic growth, investment, and wages in 2018, the non-partisan Congressional Research Service (CRS) says in a new report.

The tax law provided large, immediate tax cuts for profitable corporations and wealthy households while largely leaving out millions of low- and moderate-income working families. Proponents promised that the increased investment that the law would spur would raise the wages of low- and moderate-income workers, and that the increased economic growth it would generate would ensure that budget deficits didn’t grow. In fact, many proponents claim that the evidence indicates that the law is already paying for itself and significantly boosting wages. CRS’ analysis of the available data for 2018, however, shows that those claims are off base:

• Growth: For the law to boost the economy enough to pay for itself in the form of higher tax receipts in 2018, CRS estimated that the economy would have needed to grow 6.7 percent last year. It grew only 2.9 percent. As for the law’s impact on that growth, CRS suggests that the law only increased the growth of gross domestic product (GDP) by 0.3 percent— “5% or less of the growth needed to fully offset the revenue loss” from the 2017 tax law in that year. Brookings Institution economist Bill Gale also demonstrated that, far from paying for itself, the law lost significant revenue in 2018, as the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) predicted it would, even after accounting for its effect in increasing economic growth.
• Investment: Proponents of the 2017 tax law have pointed to a 7 percent increase in investment in 2018, but the CRS report provides evidence that the tax law had little to do with it. Investment tends to be volatile, CRS notes, and the biggest boost occurred in the first half of 2018, which suggests that businesses planned much of the new investment before policymakers enacted the tax law at the end of 2017. Nor was there much correlation between the types of investment that grew fastest and the tax law’s incentives: CRS found that the tax law actually reduced the incentive to invest in the area that experienced the fastest growth in 2018 — intellectual property — while providing the biggest incentive to the area — structures — that grew the slowest.
• Wages: CRS found that “[t]here is no indication of a surge in wages in 2018 either compared to history or relative to GDP growth” and that “ordinary workers had very little growth in wage rates.” It also suggested that the much-touted bonuses that companies paid to their employees in late 2017 and early 2018 amounted to 2-3 percent of the corporate tax cut. Instead, much of the funds from the tax cut benefited shareholders because corporations used their tax cut dollars “for a record-breaking amount of stock buybacks, with $1 trillion announced by the end of 2018.”

The CRS report makes clear that nothing occurred in the 2017 tax law’s first year in place that should make us question the analysis by reputable organizations such as CBO and JCT about its economic and fiscal impact. Proponents may argue that 2018 is too soon for the law to generate the economic boom that they predicted. There is, however, no reason to expect that boom to ever arrive, as decades of evidence show that tax cuts for the wealthy are an ineffective way to spur economic growth.