By Robert Duquette, CPA

This is the fifth and final entry in my five-part blog series analyzing what was promised when the Tax Cuts and Jobs Act (TCJA) was enacted compared with what has actually happened to date. In total, this analysis covers 13 topics over five separate blogs.

In my previous blogs I covered …

• Protecting American jobs
• Making taxes fairer
• Making taxes simpler
• Making individual tax rates lower
• Tax relief for small businesses so they can better compete
• Tax relief for multinational businesses so they can better compete
• Businesses to share tax savings with workers through increased wages
• Unprecedented capital expensing to stimulate new investment
• Establishing more permanence in our tax code
• Encouraging companies to bring back jobs from overseas
• Discouraging inversions
• Encouraging companies to repatriate about $3 trillion in profits “trapped” overseas

In this blog I address the goal of stimulating additional economic growth to offset the revenue reduction of tax cuts, and offer a final word on my observations as to whether the TCJA has, to date, kept its many promises.

(If you would like access to this entire series in one convenient place, it can be found here. Be sure to check back periodically, as this document will be updated as new source material becomes available.)

Stimulate Additional Economic Growth and the Tax Cuts Would Pay for Themselves Over the Long Term

The Trump administration’s 2018 Economic Report claimed there would be about 3% growth of gross domestic product (GDP) annually over the long term after enactment for the TCJA. President Trump suggested up to 6% was possible, and that growth was going to enable for the tax cuts to pay for themselves and not add to the national debt.

According to the Bureau of Economic Analysis (BEA) and a recent Bloomberg summary of that analysis, the official real GDP growth rate for 2018 (the first full year of tax reform) came in at a revised annualized rate of 2.5% compared with the 2.9% originally reported. This is slower growth than 2017’s revised rate of 2.8%, but still better than the post-recession average of 2.3%. However, according to the Congressional Research Service (CRS), this level of growth is “relatively small,” and “the data appear to indicate that not enough growth occurred in the first year to cause the tax cut to pay for itself.” And for the second quarter 2019 just ended, BEA reported that real GDP has slowed down considerably to 2.1%, after coming in at 3.1% for the first quarter.

How much GDP growth would be required to have the TCJA pay for itself? To have generated enough tax revenues in 2018 to offset the cost of the tax cut, the CRS concludes it would have taken a 6.7% GDP increase sustained over the long term. Instead, “the combination of projections and observed effects for 2018 suggests a feedback effect of 0.3% of GDP or less—which is 5% or less of the growth needed to fully offset the revenue loss from the act.” In a report released this past June, the Congressional Budget Office (CBO) projects that real GDP growth (inflation adjusted) for 2019 will only be 2.4%, with an annual average of only 1.8% over the next decade.

Since the GDP growth rate will not be good enough to pay for the tax cuts, what will be the impact on our annual deficits going forward? According to a CBO forecast issued in April 2018, shortly after enactment of the TCJA, tax reform was projected to add almost $2 trillion to our national debt over 10 years, including additional interest costs, further aggravating an already concerning level of national debt, the implications of which are beyond the scope of this article, but are real and are very serious.

This negative effect was felt quickly. For the 2018 fiscal year, which only had nine months of post-TCJA effects, a Treasury report issued last October indicated that the 2018 deficit was about $780 billion, a 17% increase from the prior year. This was primarily due to tax reform generating flat revenues (despite the approximate $50 billion increase in individual revenues from somewhat stronger GDP and employment growth), and an increase of $110 billion in spending, including $60 billion for higher interest costs.

With respect to the 2019 fiscal year, the most recent CBO forecast is projecting the annual deficit to grow even more, up to almost $900 billion. President Trump’s own chair of the Council of Economic Advisors has said tax reform has not paid for itself yet.

Sufficient GDP Growth for Tax Cuts to Pay for Themselves Goal Achieved?

No.

Conclusion

I suspect readers who support the Trump administration will see metrics in this extensive five-part analysis that generally support their view that the TCJA is working, and will believe that more time is needed to realize its potential. Critics of the administration will conclude that most of the promises were not met, and the nation needs to revisit how to better grow the economy and reduce deficits.

I did not set out to change or corroborate anybody’s opinion of the president. All I hoped to achieve is to remind readers of the promises made, put forward the relevant metrics and results to date, cite generally accepted supporting and authoritative sources, and let you decide whether or not more tax policy changes are needed.

For what it’s worth, my own opinion (not that of the PICPA, the AICPA, Lehigh University, or anyone else I may be affiliated with), is that it is difficult to conclude anything other than that the TCJA has thus far lived up to only a few key promises: providing tax relief for individual taxpayers (especially if they own a small business); simplifying taxes for individuals who no longer have to file or are eligible for the higher standard deduction; and providing even more tax relief for C corporations and multinational companies. (But these accomplishments may be threatened by current and pending tariff wars.)

However, by having failed thus far on the other promises, especially reinvestment of business tax savings and foreign “trapped” earnings into U.S. expansion and job growth, it appears to me that the TCJA has failed with regard to the two most important objectives: increasing GDP significantly and avoiding an increase in the federal debt.

For my final, overall verdict when considering the longer term, one could reasonably argue (as I wrote in part 1 of this series) that the relief for those who are clearly benefiting from tax reform (businesses and higher income taxpayers) may not necessarily be the “fairest” policy over time when considering the insufficient reinvestment of tax savings into the economy, lack of skilled and unskilled labor, lack of significant economic growth, and potential impact of growing deficits. It is, therefore, difficult for me to conclude anything other than we will inevitably face higher and more burdensome income taxes, especially the middle class, or a new type of national tax; and that we will soon experience reductions in infrastructure, defense, and climate remediation investments, as well as reductions in social safety nets that will affect all of us, directly or indirectly, particularly the middle class and those who are poor.  

With an informed electorate and a wider base of support, perhaps a “Tax Reform 2.0” can be developed with more focus on growing GDP while keeping these long term challenges in mind and without contributing to growing income inequality.  

Robert Duquette, CPA, is Professor of Practice in the College of Business at Lehigh University, a member of the Griffin/Stevens & Lee Tax and Consulting Network, and a retired EY tax partner. He has served on PICPA’s Federal Taxation Committee for over 25 years, focusing on federal tax reform and the national debt.

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