The Trump administration sought to stimulate economic growth by drastically cutting corporate taxes. However, unlike the short-term growth effects, this also brought side effects such as reduced tax revenue and an expanded fiscal deficit. We examine the impact of the tax cut policy on the U.S. economy and analyze whether its effects were sustainable.
Why Did President Donald Trump Invite a Welder to Congress?
In January 2018, President Donald Trump addressed members of Congress at the U.S. Capitol in Washington, D.C., outlining how he would lead the nation over the coming year. This is the annual State of the Union Address, where the U.S. President communicates his vision and plans at the start of each year. As the world’s most powerful leader details his key policy initiatives for the next year, it draws intense global media attention.
President Trump invited a black welder to attend. During the speech, he pointed him out and applauded him. Following the President’s lead, Vice President Mike Pence, House Speaker Paul Ryan, and other prominent American leaders applauded the welder. Who was this man that President Trump personally named and applauded?
“Corey Adams is with us tonight. He had to earn his own way through high school and was laid off during the recession of 2009. He’s now a welder, and like so many other hardworking Americans, he’s been able to buy a new home and pay for his two daughters’ education thanks to this tax cut. Get up for a moment, Corey. He’s a great welder. I told his boss that myself.”
Trump invited welder Corey Adams to Congress to showcase his corporate tax cut policy’s positive impact on the U.S. economy through his example. Instead of dry statistics about corporate net profits rising by a few percentage points or GDP growth exceeding 4%, he presented the tangible reality of a Black worker whose wages increased thanks to the tax cuts he pushed through. In other words, it was to make the results tangible for people to feel.
The Correlation Between Corporate Tax and the Economy
So, what exactly were the specifics of the tax cut policy Trump pushed? The core of the tax reform bill passed in December 2017 was to lower the corporate tax rate, which had been up to 35%, to 21% in one fell swoop. It unified the corporate tax rate at 21% regardless of company size. Corporate tax is levied on profits earned through business operations. Companies previously subject to the highest tax bracket, paying 35% of their profits in taxes, directly benefited from the tax cut policy. With reduced taxes owed to the state, companies could generate greater profits.
Around the time the corporate tax cut was decided, the British economic publication The Economist analyzed that the reduction would increase the net profits of American companies by an average of about 10%. Simultaneously with the corporate tax cut, a tax break was passed that would temporarily tax cash held overseas by American companies at just 15.5% if they brought it back to the US, lower than the corporate tax rate. The intent was to encourage companies to bring back money hoarded abroad, invest it in the U.S., and create jobs by offering lower taxes.
What were the effects of the corporate tax cut? The tax reform package took effect in January 2018. While it’s premature to judge its impact in the short term, many attribute the strong GDP growth rate in the second quarter of that year to the effects of the major corporate tax cut policy. The U.S. economy showed a smooth and robust trajectory. Following the implementation of the corporate tax cut policy, the U.S. economic growth rate in the second quarter of 2018 recorded an annualized growth rate of 4.2%, the highest quarterly rate in four years. The unemployment rate stood at 4.0% as of June that year, the lowest level since 2000. Notably, the unemployment rate for African Americans fell to the lowest level since records began, dropping to the 5% range. With key economic indicators like growth rate and unemployment rate showing such strong figures, President Trump has been projecting confidence. Immediately after the Q2 2018 growth rate was announced, he appeared on a radio program stating, “If we cut our trade deficit in half, we could achieve growth rates of 8 to 9 percent.” Of course, growth slowed in the third quarter due to the shutdown’s aftermath and seasonal factors, but the second quarter’s record remains a significant achievement.
Regardless, economic experts point to corporate tax cuts as the primary driver behind the rapid growth of the U.S. economy in the second quarter of 2018, even amid a major trade war with China. They believe that reducing the tax rate from a maximum of 35% to 21% was the primary engine driving U.S. economic growth. Bolstered by confidence in the positive effects of the corporate tax cut, President Trump is now signaling not only further reductions in the corporate tax rate but also a potential cut in the capital gains tax rate levied on the sale of stocks or real estate.
Why did cutting corporate taxes positively impact economic growth and unemployment? Simply lowering taxes doesn’t automatically revive the economy. President Trump’s corporate tax cut helped U.S. economic growth because businesses enthusiastically responded to his pro-business tax reform. Indeed, once the corporate tax cut was decided, companies stepped forward, pledging to use the additional profits to raise worker wages and provide bonuses. Many large corporations, including AT&T, Walmart, Apple, Walt Disney, Starbucks, and American Airlines, announced wage increases for their employees.
Walmart, the largest single employer in the U.S. with over 1.5 million employees, announced on January 11, 2018, that it would raise its existing minimum wage from $9 to $11 per hour. This increase added approximately $300 million annually to Walmart’s labor costs. Experts estimate this represents about 15% of the additional profits Walmart gained from the corporate tax cut.
Facility investments like factory construction and corporate mergers and acquisitions also became more active. Automaker Fiat Chrysler Automobiles announced plans to invest $1 billion in its Michigan plant, creating 2,500 jobs. Apple also responded enthusiastically to the U.S. government’s tax cut policy. It announced it would repatriate $250 billion in cash held overseas to the U.S. and pay $38 billion in taxes on that amount. It also unveiled plans to create 20,000 more jobs in the U.S. over five years starting in 2018 and invest $350 billion, including building a second headquarters. This signaled that, with taxes on overseas profits drastically reduced, the company would repatriate that money and reinvest it domestically.
The tax cut policy, epitomized by the corporate tax reduction, did not originate solely from President Trump’s mind. His party, the Republican Party, had consistently pushed for tax cuts, including corporate tax reductions, as its official platform. The Republican Party’s fundamental philosophy is that reducing various taxes, such as corporate and income taxes, enables the economy to grow more dynamically. The main logic is that while lowering tax rates may initially reduce government tax revenue, increased corporate activity expands the economy’s scale. As companies earn more money, overall tax revenue ultimately increases. This argument emphasizes that the total amount of tax collected is more important than the tax rate itself, rooted in the belief that when the economy is thriving, citizens’ incomes naturally rise without the need for artificial redistribution policies.
Reducing corporate taxes and easing regulations also encourages American manufacturing companies that moved overseas to return to the U.S., creating more jobs. This policy of incentivizing domestic manufacturing companies that moved overseas to return is called ‘reshoring’. The reshoring policy, which began under the previous Barack Obama administration, has been further strengthened since the Trump administration took office.
One measure used to evaluate the effectiveness of the economic policies introduced by the President and the ruling party is the economic hardship index. It is calculated by adding the unemployment rate and the inflation rate, then subtracting the economic growth rate. The formula is simple: as unemployment and inflation fall and economic growth rises, the economy as perceived by the public improves. In June 2018, the U.S. Economic Pain Index was at a level even better than during the long boom of the 1990s.
Concerns about side effects are also significant
However, there are also considerable concerns about the negative effects that a sharp reduction in corporate taxes could bring. This is because, as seen in the economic growth rate for the third and fourth quarters of 2018, there is concern that the effect may be short-lived. Furthermore, there are strong voices arguing that even if corporate profits increase due to the corporate tax cut, the majority of the benefits will be captured by a small number of wealthy individuals. This is because companies primarily use the increased profits from the tax cut to buy back their own shares and increase dividends. A share buyback refers to a company purchasing its own shares on the stock market. By buying back its own shares traded on the market, the company increases its ownership stake, which is advantageous for defending management control. Furthermore, when a company buys back a large number of shares, the stock price rises accordingly, allowing shareholders to profit from the price difference. Dividends refer to distributing profits earned by the company to shareholders, a benefit exclusively available to those holding shares. While corporate tax cuts led companies to offer bonuses to employees, these bonuses are often one-time events. Critics point out they do little to significantly boost workers’ incomes. As expected, U.S. corporate share buybacks surged dramatically in 2018.
Trump Tax Cut Aftermath: Concerns Over Expanding Fiscal Deficit
Following the Trump administration’s corporate tax cut in 2017, concerns about the U.S. fiscal situation have materialized. The tax cut policy, lowering the corporate tax rate from 35% to 21%, aimed to stimulate corporate investment and economic growth. However, it resulted in reduced tax revenue and an expanded fiscal deficit. According to a recent report, this tax cut policy is expected to reduce tax revenue by up to $9 trillion over the next decade, which is likely to further deepen the U.S. fiscal deficit. Furthermore, former President Trump, having secured re-election, announced plans to further reduce the corporate tax rate to 15%. This additional tax cut raises concerns that it could further expand the fiscal deficit. While such tax cut policies may contribute to short-term economic stimulation, in the long term, they could negatively impact the sustainability of the U.S. economy due to reduced tax revenue and increased fiscal deficits.
