AYESHA RASCOE, HOST:
President Donald Trump has asked Congress to act on one of his top domestic priorities.
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PRESIDENT DONALD TRUMP: And the next phase of our plan to deliver the greatest economy in history is for this Congress to pass tax cuts for everybody. They're in there. They're waiting for you to vote.
RASCOE: Cutting taxes was also a priority during Trump's first term. His 2017 overhaul of the tax code slashed corporate taxes. It also cut taxes on small businesses and individual taxpayers, but those cuts expire this year. Now, as Republicans and Congress move to extend them and add even more cuts, we wanted to look at the 2017 tax changes and what effects they had. Elena Patel is a professor at the University of Utah's Eccles School of Business. She's also a fellow at the nonpartisan Urban-Brookings Tax Policy Center. Thanks for being with us.
ELENA PATEL: Thanks for having me.
RASCOE: Let's start with the 2017 tax cuts for corporations. Taxes on their profits were slashed from 35% to 21%, and President Trump promised this would be, quote, "rocket fuel for the economy by incentivizing corporate investment." Did that happen?
PATEL: I think it's a question we may, unfortunately, never know the answer to just because of the pandemic. The Tax Cuts and Jobs Act became law at the beginning of 2018, and just two years later, the pandemic arrived. And the pandemic fundamentally altered investment in the U.S. in a way that's really hard for us to separate from anything that might have come from the Tax Cuts and Jobs Act. And there is some evidence that there were small increases in investment, but there's no evidence that aggregate investment increased. Instead, what we think happened is that the Tax Cuts and Jobs Act just changed which firms were investing, maybe without actually affecting overall investment.
RASCOE: Now on to small businesses - their tax bill was cut in half from 40 to 20%. I mean, small business owners must have benefited from that, right?
PATEL: We definitely know that small business owners got a tax cut, but we also know that that tax cut was not evenly spread out throughout the economy. It's definitely the wealthiest of the wealthy that benefited from that tax cut. And it was not accompanied by things we might have hoped for, like increased employment or an increase in wages.
RASCOE: And what about individual taxpayers? How big were their tax cuts, and who benefited the most from those?
PATEL: So estimates of the change in the tax bill for individuals certainly shows that everybody has lower taxes right now. But, again, the benefit of the cut in individual tax rates is felt the highest at the top of the income distribution. And so at the top of the income distribution, there are estimates that suggest that tax savings were as much as $250,000, compared to just $70 for the lowest quintile.
RASCOE: And is the big thing for regular people, the standard deduction, was that the biggest change 'cause it doubled the standard deduction?
PATEL: It's a combination of lower tax rates - although they only fell by a couple percentage points in each bracket - but also the standard deduction. And I would just take a second to applaud that change. That's a change that makes the tax code simpler for everybody. Fewer people have to itemize. It's easier to do your tax return. So I think everybody thinks that increasing the standard deduction is generally a good change to the tax code.
RASCOE: A big promise that was made to individuals was that the businesses would have a lot more money leftover that they would use to reward their employees with higher wages. So, basically, it's like, yes, the businesses would get a big tax cut, but that would help you as an employee, 'cause you would get higher wages. Did that come true?
PATEL: No, there's absolutely no evidence that shows that anybody below top management received any higher wages as a result of the tax cuts.
RASCOE: The First Trump administration promised these changes would not grow the budget deficit. How did that work out?
PATEL: So I think we estimated that the tax cut in 2017 would reduce revenue by 1 1/2 trillion dollars. That was the official estimate. Definitely, lots of groups tried to account for things that are called dynamic effects - changes to the size of the economy, employment, investment - all of these sort of economy-growing ingredients, and how much that might reduce the cost of the bill. And the largest estimate out there is that it might have offset the cost by about 30%. There's no estimate out there that suggests that the Tax Cuts and Jobs Act paid for itself.
RASCOE: In his address to the nation last week, President Trump promised to balance the budget. If the tax cuts go through - and it does appear they will - is that mathematically possible?
PATEL: There's no world in which that's mathematically possible. Lots of people have tried to do this calculation to understand the projection that the House GOP is making that there'll be nearly $3 trillion in new growth under the TCJA extension.
RASCOE: And when you say TCJA, you mean the 2017 tax cuts.
PATEL: That's exactly right. And that would require something like a 75% sustained increase in real economic growth, which is just completely implausible, and I think that most people will back that up. Again, a lot of groups have tried to estimate if we extend the TCJA, what kind of growth can we expect. And the highest end of this for $5 trillion in spending is $710 billion in new revenue. So that's far short of 2.6 trillion, which is what's being assumed right now by the House GOP.
RASCOE: That's Elena Patel, professor at the University of Utah and fellow at the Urban-Brookings Tax Policy Center. Thank you so much for being with us.
PATEL: Thank you. Transcript provided by NPR, Copyright NPR.
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