A look at the economic impact of the 2017 tax cuts
A look at the economic impact of the 2017 tax cuts
It’s undeniable that taxes are important — but they’re important in a sensible-shoes, getting-enough-fiber-in-your-diet kind of way.
Eric Zwick knows this well. He’s an economist at The University of Chicago’s Booth School of Business. “I had an advisor who referred to corporate tax as the intersection of boring and boring,” he said.
Zwick has spent much of his career at that intersection, because, he said, a lot of important things happen there. He just co-authored a study on the economic impact of President Donald Trump’s 2017 tax cuts, which slashed corporate taxes from 35% to 21%.
The study found companies invested a lot of that extra money into things like “building a factory, or buying new machines, buying computers…”
This is the hope with corporate tax cuts: That companies will take their extra dollars and put them back into the economy, that they will use that money to expand, invest in equipment and hire more workers — workers who will pay taxes. This is why the Trump administration said the tax cuts would pay for themselves. So … did they?
“That’s just not true at all,” said Princeton University economist Owen Zidar, who co-authored the study with Eric Zwick. They found that after the 2017 cuts, corporate spending rose between 10% and 20%, totaling billions of dollars a year. But it’s not nearly enough to make up for the more than $100 billion per year the government loses because of the lower corporate tax rates.
“These are enormous and staggering amounts of money, and so I would just say focus on the numbers,” said Zidar.
But nobody is focused on those numbers, because right now everyone’s talking about personal income taxes. That part of the 2017 Tax Cuts and Jobs Act is set to expire this year.
“The corporate tax cut, they were able to make it permanent,” explains Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University. “However, the individual tax cuts were too expensive, and so — for budget reasons — they had them expire after 10 years.”
Bruckner said that to keep those lower tax rates in place, Congress would have to take action to extend them. She said those tax cuts lowered tax rates for almost everyone. She has studied how middle income and lower income taxpayers have spent that extra money.
“I always ask my students, ‘What do you think people pay for with that money?’ And they’re always like, ‘A trip to Disney? A vacation?’ And I’m like, ‘No! That’s not what these folks are paying for. They’re paying off credit card debt; they’re paying off medical debt; they are paying rent.’”
Lower-income taxpayers tend to have pent up demand — things they need or want but can’t afford. So when they have extra money, they’ll spend it, and that ripples through the economy. In fact, Bruckner herself still vividly remembers a tax refund check for $500 she got back in the 1990s when she was a poor law student.
“I was working three jobs and going to school full time,” Bruckner recalled. “That check felt incredibly important to me.”
Bruckner explains that the economics of income tax cuts is pretty different for wealthier people: They don’t necessarily have unpaid bills or pent up demand for stuff they can’t afford. For higher earners, extra money will often go into savings, and that doesn’t really help the economy.
Extending those personal income tax cuts won’t come cheap. The Congressional Budget Office estimates it would cost the government nearly $3.5 trillion over the next 10 years. Add to that President Trump’s plan to cut corporate taxes further from 21% to 15%, and you’ve potentially got even less money coming in.
“The big debate — the ‘Super Bowl of Tax’ — is going to be played, I like to say, on the field of individual income tax policy,” said economist Eric Zwick.
Zwick worries the debate will get political, and the boring stuff will get lost. Stuff like: How can the government bring in enough money to pay for the things it wants to do? That’s a question we’ve been dodging for decades, and the result is a national debt that totals $35 trillion, which makes our whole economy vulnerable.
But the fix isn’t some Hail Mary pass, said Zwick. We’ve done it before.
“In the late ’90s, the U.S. had a vibrant economy and a tax system that raised as much revenue as we were spending,” he said. “Just night and day difference in terms of our fiscal situation. So, I think the tax system can party like it’s 1997 … if there are Prince fans out there, maybe they’ll forgive me.”
I think they will. After all, who better to spice up a tax conversation — bring a little flair to the corner of boring and boring — than Prince?
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