Former President Donald Trump passed major tax cuts in 2017 that significantly reduced rates for businesses and individuals. Critics charged the tax cuts would balloon federal budget deficits and debt. However, supporters argue the supply-side reforms will pay for themselves by spurring economic growth. This article examines arguments on both sides concerning Trump’s tax plan and its potential impact on debt levels.
Overview of the Tax Cuts and Jobs Act (TCJA)
The TCJA was the largest overhaul of the tax code in over 30 years. It included ():
- Lower corporate tax rate reduced from 35% to 21%
- Individual tax brackets lowered (top rate reduced from 39.6% to 37%)
- Standard deduction doubled
- State and local tax (SALT) deduction capped
- Estate tax exemption doubled
- Individual mandates of ACA eliminated
Proponents claimed these business-friendly reforms would incentivize investment, boost wages and jobs, and grow the overall economy. But critics charged the tax cuts were heavily skewed to the wealthy and would swell federal deficits.
Projected Impact on Debt and Deficits
Nonpartisan analyses projected the TCJA would add $1-2 trillion to deficits over 10 years (). This included:
- $400 billion from lower individual income taxes
- $650 billion from reduced corporate taxes
- $600 billion in additional interest costs
Lower revenues plus higher interest expenses on debt were expected to significantly worsen deficits relative to economic growth. Debt held by the public was forecast to rise from 77% of GDP to over 96% by 2028.
Arguments Why It Won’t Increase Debt
Growth Will Offset Revenue Losses
Supporters argue lower taxes will accelerate economic growth enough to recoup revenue loss from the rate cuts (). However, macroforecasts show growth effects only replacing 1/3 of lost revenue over a decade.
Corporations Will Repatriate Overseas Profits
Advocates claim the lower repatriation rate on foreign profits will bring home billions in offshore cash (). But studies show much offshore cash was already invested in U.S. assets or bonds. The one-time repatriation wave only offsets a small share of cuts.
Wider Tax Base from Faster Growth
Some contend a larger overall economy will naturally increase total tax receipts and offset rate reductions (). But economists say marginal growth from tax cuts will not outweigh built-in revenue losses.
Lower Rates Will Discourage Tax Sheltering
Proponents say lower rates lead to less tax sheltering activity, broadening the effective tax base. But evidence shows base erosion continued under Reagan-era cuts (). Tax avoidance remains profitable even at lower rates.
Arguments Why It Will Increase Debt
Past Revenue Losses from Tax Cuts
Critics note revenue fell following tax cuts under Reagan and Bush (). Lower rates did not produce enough growth to pay for themselves as promised. There is little reason to expect a different result from TCJA.
Challenges of Debt Financing Tax Cuts
With an aging population, financing tax cuts through further deficit spending is risky (). Trillion-dollar increases in the debt limit room for counter-cyclical stimulus during recessions.
Much of the Cuts Went to Wealthy
Wealthier households receiving larger tax reductions are less likely to spend additional income compared to lower-income groups (). Thus tax cuts for the rich have a weaker growth impact.
Business Investment Impact Was Modest
Evidence shows the surge in business investment following TCJA leveled off by 2019. Firms used windfalls more for dividends and buybacks rather than sustained capital investment or hiring ().
In the several years since passage of the TCJA, evidence indicates federal deficits have substantially worsened while growth effects were short-lived. Supporters’ promises of revenue neutrality from the tax cuts have largely failed to materialize. While specifics remain debated, the weight of analysis suggests Trump’s major tax cuts increased federal debt levels without providing a lasting boost to economic performance.
- Tax Foundation. “Details and Analysis of the 2017 Tax Cuts and Jobs Act” https://taxfoundation.org/2017-tax-cuts-jobs-act-analysis/
- Congressional Budget Office. “The Budget and Economic Outlook: 2019 to 2029” https://www.cbo.gov/publication/54918
- Tax Foundation. “Tax Cuts and Jobs Actdynamically scores as a pro-growth tax cut” https://taxfoundation.org/tcja-economic-growth-effects-dynamic-scoring/
- Tax Policy Center. “Can tax reform pay for itself through growth?” https://www.taxpolicycenter.org/taxvox/can-tax-reform-pay-itself-through-growth
- Committee for a Responsible Federal Budget. “Will Tax Reform Grow the Economy?” http://www.crfb.org/papers/will-tax-reform-grow-economy
- Brookings. “Have tax cuts ever generated more revenue?” https://www.brookings.edu/blog/up-front/2017/11/28/have-tax-cuts-ever-generated-more-revenue/
- CBPP. “Chart Book: The Legacy of the 2001 and 2003 Bush Tax Cuts” https://www.cbpp.org/research/federal-tax/the-legacy-of-the-2001-and-2003-bush-tax-cuts
- USC FBE Applied Economics Workshop. “Federal Deficits and Interest Rates: A Fresh Perspective” https://losey.usc.edu/files/2013/06/Laubach-and-Williams-Fed-Interest-Rates-5.29.13.pdf
- Wharton Budget Model. “An Analysis of Senator Sander’s Tax Proposals” https://budgetmodel.wharton.upenn.edu/issues/2016/1/27/sanders-tax-proposal
- CBPP. “Corporate Tax Cuts Mainly Benefit Shareholders and CEOs, Not Workers” https://www.cbpp.org/research/federal-tax/corporate-tax-cuts-mainly-benefit-shareholders-and-ceos-not-workers
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