They may have other differences, but all the major Democratic presidential candidates agree they want to repeal the Tax Cuts and Jobs Act (TCJA) of 2017. The GOP’s landmark tax reform made major changes to tax deductions, slashed the corporate tax rate from 35 per cent to 21 per cent, cut personal income tax rates, and doubled the child tax credit.
When the TCJA first passed, it faced 20-point net disapproval, but public opinion has become more favourable. Some Democrats claimed the changes amounted to a middle-class tax hike, calling it a “scam” that wouldn’t strengthen the economy. Yet in 2018 the economy grew by three per cent—the fastest annual growth in over a decade. Based on the limited evidence we have so far, the tax reform seems to be working.
Still, some members of President Trump’s inner circle seriously oversold the potential benefits of the package. Treasury Secretary Steve Mnuchin, economist Stephen Moore, and National Economic Council Director Larry Kudlow have all claimed that the TCJA is “paying for itself”—in other words, enough economic growth has been stimulated to prevent tax revenue from falling. This is simply not true – the budget deficit has risen, mostly due to falling tax revenue. Similarly, the president’s unrealistic promise of six per cent growth has not materialised.
At the same time, however, serious economists who backed the cuts never claimed they would pay for themselves or turbocharge growth. Instead, the economic case for the Tax Cuts and Jobs Act largely rests on the $647bn of corporation tax cuts it included. As one comprehensive study found, corporate income taxes have the largest negative impact on growth for each dollar of revenue they raise, because the supply of capital tends to be more responsive to taxation than the supply of labour.