Some of its effects are already visible, and some of them will take months, or even years, to understand. After all, economists are still publishing studies about the effect of the last comprehensive tax overhaul back in 1986, signed by Ronald Reagan.
Here’s what we can — and can’t — say about how President Donald Trump’s tax cuts have impacted the economy so far.
1. Corporate taxes fell off a cliff, fueling deeper deficits
One of the central features of the Tax Cuts and Jobs Act was a drop in the corporate income tax rate, from 35% to 21%.
Even though plenty of companies never paid that full rate because of various exemptions, the decrease still took a big bite out of corporate tax collections. They plunged from a seasonally-adjusted annual rate of $264 billion in the fourth quarter of 2017 to $149 billion the next, when the new rules went into effect, and they haven’t bounced back.
Corporate income taxes make up only a small slice of the federal government’s overall tax revenue, and have declined as a share of the economy from their post-World War II height in 1951. However, corporate tax revenue still tends to increase when the economy is doing well. This is the first time corporate taxes have taken such a hit when the economy is not in recession.
“In some ways, our economy is held back by the public investments that we are not making,” said Steve Wamhoff, director of federal tax policy for the left-leaning Institute on Taxation and Economic Policy. “Even if we think that spending on infrastructure would be a good thing, politically we can’t do this spending because we have to address this deficit.”
2. A short-term economic boost is fading
Part of that came from an increase in business investment in research and development, new factories and equipment, possibly encouraged by a provision that allowed businesses to immediately expense capital expenditures, rather than expense them gradually over several years. Business investment grew 8.4% from the fourth quarter of 2017 to the fourth quarter or 2018. That’s a good sign because better factories, equipment and tools are supposed to boost productivity, which in some cases allows workers to make more money.
At the same time, they say the effects will take years to play out.
The hurdle to investment in recent years has more to do with weak demand for goods rather than a shortage of capital, according to Kyle Pomerleau, chief economist at the right-leaning Tax Foundation.
“If you look at the US economy, it’s not lack of cash that’s keeping companies from investing,” Pomerleau said. “The whole issue is whether that cash can be deployed in a productive manner. Are there investments out there that result in a high enough after-tax return to be worthwhile?”
Meanwhile, the White House has engaged in a trade war that makes raw materials like lumber and steel more expensive in the US, raising the cost of domestic production.
“You have two tax policies working against one another,” Pomerleau says.
3. Rich people gained more than poor people
Here’s one way of looking at it: As a result of both the business and personal income tax cuts, households making between $500,000 and $1 million will see their after-tax income rise by an average of 5.2%. Households making less than $50,000 (the median income is $61,372 in the US) see only a 0.6% increase.
In part, that’s because of a provision that allows taxpayers that earn money through “pass-through” businesses to take a deduction equal to 20% of that income. Pass-through businesses include everything from architecture firms to part-time landlords incorporated as partnerships and limited liability companies.
“The people who are benefiting the most, and the people who are benefiting the most through pass-throughs, are really rich people,” said Jason Oh, a tax law professor at the University of California-Los Angeles.
The tax act’s unequal distribution of benefits is now prompting calls for further changes to even the scales.
4. Most other impacts: Either too soon to tell or too hard to see
The 2017 tax overhaul either pleased or dismayed a host of special interests, but it’s still difficult to know whether their respective hopes or fears came true.
Take the mortgage interest deduction, which was capped at $750,000 in total amount borrowed and also weakened by the doubling of the standard deduction. Realtors worried that would put people off from buying homes — especially the most expensive ones.
The homeownership rate, however, has continued to rebound from a low in 2016. And the housing market is subject to so many other factors — from mortgage interest rates to the price of concrete — that it’s hard to isolate the impact of a tweaked tax provision.
“Job opportunities and demographic trends influence migration more than tax rates,” the report said.
However, the effect will be uneven. Lower-income filers will no longer benefit from the charitable deduction, which means the causes they favor may lose out.
“Larger institutions that depend on higher-income households may not feel the impact,” said Una Osili, who authored the Indiana University report. “But if you think about the causes that everyday givers support, like community based organizations, they see more of an impact.”
The impact that’s unseen
Most of the true impact of the Tax Cuts and Jobs Act is still yet to be felt. But one implication is already operating in the background. Tax cuts can help ease the impact of economic downturns, and now, there’s a lot less room to use them.
“The thing that’s related that I’m more concerned about is, we will eventually face another recession,” says Oh, of UCLA. “And what we’ve done through the Tax Cuts and Jobs Act is use a bunch of the tools that we need to deal with the next recession, at a time when we don’t have a recession.”