Did the Trump Tax Cuts 'Work'?

The 2020 election cycle has been severely disrupted by the Covid-19 pandemic, and is now being affected by the law and justice issues related to the death of George Floyd at the hands of a Minneapolis police officer.

But there’s still a presidential election less than five months away, and whatever else is going on, the success or failure of the 2017 tax cuts pushed by President Trump and passed by a Republican Congress is certain to be a major issue. You would expect Republicans to claim the tax cuts were a success and Democrats to attack them as a miserable failure.

So did the Trump tax cuts work?

That’s a different question than “were the Trump tax cuts wise?” Democrats seem to never support tax cuts and are always advocating tax increases, so you would expect them to disagree about whether they were wise.

Whether they worked or not should be determined by the design goals of the tax cuts’ proponents, and we know what those goals were. President Trump and congressional Republicans intended the tax cuts to stimulate increased economic growth, which would result in increased job creation and personal income.

Further, the tax cuts were designed to target the middle class and not be a tax cut for upper-income earners. Specific features were designed to limit the upside benefit for high income earners, such as the cap on the deduction for state and local taxes (SALT).

So what happened? IRS analysis released in early March, before the world went crazy, tells us some very interesting things.

The tax cuts did increase economic growth over previous years and over the CBO predicted baseline, though not quite reaching the Trump administration’s 3.0 percent annual goal. This increase in economic growth resulted in an increase in adjusted gross incomes of 5.7 percent in 2019 over 2018, the biggest jump in AGI in several years.

The tax cuts also succeeded in targeting benefits at the middle class. Taxpayers reporting between $40,000 and $50,000 per year had the largest percentage tax cut of any group, with a 14.5 percent tax cut. Overall, those who earned less than $200,000 per year saw a 10.96 percent tax reduction with the sharpest reductions for those who earned between $25,000 and $100,000.

By contrast, those who earned over $1 million per year saw the smallest tax reduction (4.3%).

Between lower taxes and higher adjusted gross incomes, Americans were significantly better off after the Trump tax cuts.

And federal revenue has consistently increased in the years after the Trump tax cuts. Despite the enormous tax cut, federal revenue increased by $10 billion in 2018, by $130 billion in 2019, and was projected to grow by even more in 2020 before the Covid-19 pandemic and its economic effects.

It’s true that the federal budget deficit has also increased, but that is because federal spending has increased faster than revenue has. That’s the fault of Congress, not the tax cut.

So did the Trump tax cuts work? Yes—GDP growth increased, which led to significantly increased personal incomes and job creation. And the individual tax cuts primarily benefitted middle-income earners rather than the wealthy. But whether anyone will care about that in November is another question.