The 2017 tax cuts delivered results for the American people, despite the predictions of secular stagnation.
In 2017, as the two of us joined President Trump’s Council of Economic Advisers, government and private-sector forecasters were unanimous in the view that the U.S. economy had entered a “new normal.” Real wage growth was stuck in neutral. After decades of rising by more than 2 percent per year, productivity growth was now destined to barely hit 1 percent. Investment in new plants and equipment had slowed to a paltry 2.5 percent, and prime-age labor force participation was on an irreversible, “secular” trend downward.
But when we in the Trump administration studied the economic data and surveyed a large academic literature, we realized that these trends were not inevitable. In large part, they were the direct consequence of bad policy, especially from the Obama administration. Most importantly, bad tax policy that deterred domestic capital formation and investment in American workers was behind the stagnation of economic wellbeing.
To remedy these defects in the U.S. tax code, in the 2017 Tax Cuts and Jobs Act we not only lowered the statutory corporate income tax rate from the highest among advanced economies (35 percent) to a more competitive 21 percent, we also allowed firms to fully expense investment in new equipment. To help increase labor-force participation, we not only lowered personal income-tax rates across the board, we also doubled the Child Tax Credit, with means testing and work requirements, and almost doubled the standard deduction for individual income taxes, thereby lowering effective marginal tax rates for lower-income workers.
To help pay for these tax cuts for business investment and middle-class households, we also capped the deduction for state and local taxes — a federal tax subsidy for the highest-income taxpayers in high-tax states that cost more than $100 billion each year — and introduced new measures to prevent corporate profit-shifting to overseas tax havens.
At the time, we predicted that these reforms would boost productivity-enhancing business investment by 9 percent. In addition, we predicted that by both enhancing worker bargaining power and increasing new investment in domestic plants and equipment, the average household would see real income gains of $4,000 per year, and that those gains would disproportionately accrue to lower-income workers.
Though we were criticized at the time by the secular stagnationistas for being overly optimistic, data released over the past four years have met or even exceeded our predictions.
In 2019 alone, real median household income in the U.S. rose by $4,400 — a bigger increase in one year than in the entire 16 years through the end of 2016 combined. From December 2017 through the end of 2019, real wages for the bottom 10 percent of the wage distribution rose 8.4 percent, while real wages for the top 10 percent rose 5.2 percent. Real wealth for the bottom 50 percent rose a staggering 28.4 percent, while that of the top 1 percent rose 8.9 percent.
From the start of the previous recovery in July 2009 through the end of 2016, 1.6 million Americans between the ages of 25 and 54 fell out of the workforce, but after the 2017 tax cuts, 1.8 million people entered or re-entered the workforce. When we argued that the downtrend of labor-force participation would reverse itself, progressive economists howled derisively.
Crucially, while growth in business investment had been on a downward trend in the years leading up to 2017, after the 2017 tax cuts, business investment surged and by the end of 2019 was 10 percent above its pre-2017 trend exactly as the models predicted. As a direct result of this increased investment, labor-productivity growth — the ultimate source of real wage gains — rose almost 50 percent, from a historically anemic 1.1 percent to 1.6 percent. Among G7 economies, the U.S. was the only one to see productivity accelerate from its pre-2017 average.
As we reflect on the 2017 tax cuts, there are instructive lessons for current economic policy-making, particularly in light of declining real wages in 2021 and business investment plateauing at a level still well below its pre-pandemic trend. Biden is bringing back the failed Obama policies, and they are having the same effect now that they did then. But this time around, common-sense moderates like Joe Manchin can see the positive evidence regarding Trump’s tax policies with their own eyes. Biden’s team can’t handle the truth about this success, and low-wage American workers are the victims of this ideological crusade against economic science.
Looking ahead, it might seem that Chuck Schumer will lean on Joe Manchin until the stagnationistas’ bill is passed, but we see it another way. There must be more than one or two Democrats who have watched recent evidence, truly do care about wage growth and income inequality, and, thus, will want to preserve the Trump tax cuts. Democrats are losing this battle because they have lost the war.