How Trump’s Tax Cuts Changed American Economy So Far

Just a few days before leaving the White House for Christmas holidays in 2017, President Donald Trump signed the Tax Cuts and Jobs Act. In doing so, Trump had a three-fold agenda: he wanted to cut individual income tax rates, double the standard deduction, and eliminate personal exemptions. When he was only trying to pass the Tax Cuts and Jobs Act in September 2017, he sounded highly enthusiastic about its possible effects on American economy and the lives of American workers. Calling the act “a revolutionary change,” Trump envisaged that jobs would start pouring into the country, companies would compete for American labor, and wages would skyrocket to heights never seen before in American history.

Although analysts agree that it is too early to talk in 2019 about the fulfilment of Trump’s promises, there are already signs that indicate whether his vision of the future is going to be right. Trump’s tax cuts have already made some impact on American economy, and, based on visible effects, it is possible to make tentative predictions about the country’s further economic development. This article explains how Trump’s Tax Cuts and Jobs Act has changed the economy so far and adumbrates some conceivable ways it can continue influencing it in the near future.

What is clear by now is that Trump’s tax cuts have caused a drop in the corporate income tax rate from 35 percent to 21 percent and, as a corollary of this drop, they also deepened deficits. President’s idea was to lower tax rates but keep the seven income tax brackets. He also postulated that these tax rates would revert in 2026.

The brackets indicated in the Tax Cuts and Jobs Act are as follows: the highest tax bracket is $500,000 for singles and $600,000 for married couples. From 2018, they pay a 37 percent rate after exemptions and reductions. To compare, in 2017, the rate was a 39.6 percent. As income levels rise with inflation, more tax payers would find themselves in the highest tax bracket, under Trump’s new method. This would not have happened under the old tax law. It is estimated that by 2025, 8.9 percent of people would pay more than they had paid before the introduction of the Tax Cuts and Jobs Act.

Because of the decrease of the corporate income tax rate, corporate tax collections slid as well. They slid from an annual rate of $264 billion in the fourth quarter of 2017 to $149 billion in 2018, when the new rules were brought into effect. And they have not jumped back since. It is crucial to understand with regard to corporate tax revenue is that it increases in economically stable times. It plunges only when the economy is in recession. Trump’s tax cuts invalidated this rule. For the first time in history, corporate tax revenue dropped when the economic activity is not in decline.

Even if corporate income tax revenue rise in the coming years, as specialists foresee, their rise will not be sufficient to minimize the national debt. The Congressional Budget Office has recently calculated that Trump’s tax revolution would add $1.85 trillion to the national debt over the next eleven years, even if various macroeconomic effects will be highly positive during this period.

It is true that under the new law, business investment grew 8.4 percent from the fourth quarter of 2017 to the fourth quarter of 2018. This growth is taken as a positive sign by some analysts, since better equipment and tools boost productivity and bring more money to workers. And indeed, at the end of 2018, workers started receiving higher salaries, especially those who are usually paid the least.

But other analysts express less optimism concerning the growth of business investment and increase in salaries. Far from seeing a correlation between Trump’s tax cuts and better wages, they attribute the latter to a tight labor market created by ten years of continuous job growth, as well as to minimum wage hikes. They also say that the increase in business investment happened because oil prices went up. Thanks to the United States’ rich shale reserve, oil prices significantly influence the country’s domestic activity and are more responsible for the growth of business investment in 2018 than Trump’s tax innovations. Analysts also observe that business’ plans for capital expenditures have been declining for about a year now and alert us to the fact that US economic growth sank to 2.3 percent in 2019.

What is even more crucial to understand about the impact of Trump’s tax cuts on people’s lives is that his new law has already enriched rich people and is slowly but surely widening income inequality in the country. There are truly impressive statistics that Trump’s supporters bring up to hail the success of his reforms. They point out that about 66 percent of taxpayers had smaller federal tax bills this year and that total liabilities are down by nearly 25 percent. But in reality, these reductions are directly correlated with people’s income. Trump’s business and personal income tax cuts work is such a way that families earning between $500,000 and $1 million will see their after-tax income rise by an average of 5.2 percent. Families who earn less than $50,000 will have only a 0.6 percent increase. Millionaires are thus set to benefit more from Trump’s tax cuts than the working class, for the first time in American history.

But it is still early to talk about the full impact of the Tax Cuts and Jobs Act on American economy. More results are yet to be seen. Time will show whether Trump’s tax cuts are as beneficial to Americans as he envisaged or as damaging as some analysts estimate.