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Biden on Economic Growth and Trump’s Tax Cuts

Former Vice President Joe Biden wrongly says “most of the conservative think tanks,” including the Heritage Foundation, agree that the tax cuts championed by President Donald Trump “generated virtually no growth at all.”

There are many economists who might agree with Biden, the presumptive Democratic presidential nominee, that the tax cuts have not generated much, if any, economic growth, but most conservative think tanks, including the Heritage Foundation, are not among them.

The Tax Cuts and Jobs Act, passed by Congress and signed by Trump in December 2017, was billed by Republicans as a catalyst to accelerate economic growth and in turn, to create more jobs and higher wages. The law lowered many individual tax rates, nearly doubled the standard deduction, eliminated personal exemptions and increased child tax credits, among other changes. It also cut the top corporate tax rate from 35% to 21%. It is expected to add $1 trillion to $2 trillion to the federal debt over 10 years.

In an open letter to Congress in November 2017, more than 100 economists in support of the tax cuts predicted the tax cuts would “ignite our economy with levels of growth not seen in generations.”

A Congressional Research Service review of the first-year impact of the law, however, did not find evidence of “large effects particularly in the short run.”

CRS, May 22, 2019: In 2018, gross domestic product (GDP) grew at 2.9%, about the Congressional Budget Office’s (CBO’s) projected rate published in 2017 before the tax cut. On the whole, the growth effects tend to show a relatively small (if any) first-year effect on the economy. Although growth rates cannot indicate the tax cut’s effects on GDP, they tend to rule out very large effects particularly in the short run. Although investment grew significantly, the growth patterns for different types of assets do not appear to be consistent with the direction and size of the supply-side incentive effects one would expect from the tax changes. This potential outcome may raise questions about how much longer-run growth will result from the tax revision.

Last week, Biden seized on the GDP growth figures highlighted in the CRS report to argue that the TCJA has “generated virtually no growth at all.” And, Biden added, that is according to conservative think tanks, including the Heritage Foundation.

“Imagine if we had that $2 trillion tax cut and we hadn’t wasted it on the wealthy, that generated virtually no growth at all,” Biden said on “The Daily Show with Trevor Noah” on June 10. “No growth at all, according to most of the conservative think tanks.”

“And imagine if we had that $2 trillion tax cut that he promoted and got passed for the wealthy, even places like the Heritage Foundation said that didn’t grow the economy. $2 trillion,” Biden said on June 11 during a roundtable meeting in Philadelphia on opening the economy. “Imagine if we had it right now, to focus on the things that can build a new economy, invest in everything from teleconference, into providing for the kind of health.”

What Economists Say

We reached out to the Biden campaign for backup, and it passed along the nonpartisan CRS report, which as we said, concluded that “the growth effects tend to show a relatively small (if any) first-year effect on the economy.”

Biden’s campaign also pointed to a May 29, 2019, article from Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center, who wrote that the CRS report findings were consistent with the Tax Policy Center prediction in December 2017 that the “short-term macroeconomic effects” would be “extremely modest.”

“In fairness, the tax cuts didn’t occur in a vacuum,” Gleckman wrote in that same article. “Some of their benefits may have been offset by President Trump’s own highly restrictive trade policy, or magnified by new deficit spending approved by Congress in 2018.”

In his latest update about the economic impact of the TCJA, published on Feb. 5, Gleckman concluded after looking at two years of data: “Despite the Trump Administration’s rosy promises that the post-TCJA economy would boom, it has instead grown on many dimensions at roughly the same steady, unspectacular pace as it did prior to passage of the tax law.”

“Our forecast at the time the TCJA became law was for a modest short-term bump in economic output (mostly from people spending their tax cuts) followed by a gradual return to pre-TCJA trend,” Gleckman told us via email. “That is pretty much what happened. … Business investment fell after passage. Employment pretty much tracked pre-TCJA trends. GDP growth had its bump, then returned to trend.”

“Remember too that the growth story the White House told was this: The TCJA would encourage more capital investment that would lead to more productivity and, eventually, to higher wages,” Gleckman said. “The reality was: We never even got the first step, except for a brief period just before and after passage of the law.”

Gleckman acknowledged, however, that it is “impossible to pull apart tax policy from other issues, including Trump’s trade policy in 2018 and 2019.” It is possible, he said, that the “TCJA contributed to more growth but that benefit was offset by the tariffs (which are a tax increase on US consumers and businesses). Or not.”

“The disruptions of 2020 mean we never will know the long-term effects of the TCJA,” Gleckman said. “But based on what we saw in 2018 and 2019, there is no evidence that the TCJA contributed very much to economic growth.”

Those analyses — from CRS and the Tax Policy Center, which is not a conservative group — provide some ammunition for Biden’s claim that the TCJA “generated virtually no growth at all.” That’s his assessment, and some economists agree.

But Biden is wrong to claim that “most of the conservative think tanks” agree.

Biden’s campaign cited three articles that it says came from conservative institutions: two from the American Enterprise Institute and one from the Tax Foundation. None of them support Biden’s claim, though.

The article from Nicole Kaeding, then at the Tax Foundation, was titled “The Tax Cuts and Jobs Act After A Year” and was published on Dec. 17, 2018.

Kaeding wrote that one year after the law’s passage there was “very little” evidence “we point to on how the Act has impacted the U.S economy.” But Kaeding also wrote that “the law’s design is such that the economic impacts are long-run. It takes several years for the lower cost of capital to impact investment. Firms need time to plan, purchase, and permit new investments before they put the items into service. As we noted in our original score, much of the acceleration of growth happens several years after the law’s original passage, before fading as provisions in the law expire.”

Garrett Watson, a senior policy analyst at the Tax Foundation, said Biden is distorting the Tax Foundation’s position.

“Our position is not that the TCJA ‘has generated no growth at all,’ but rather that identifying the specific impact the TCJA had on growth is challenging given the many other factors at play that drive business investment and economic growth,” Watson told us via email. “This includes the economic headwinds produced by the escalating trade war in 2019 and the coronavirus pandemic today. This is in addition to the fact that it may take several years to isolate the impact of a tax change, as Nicole pointed out in her piece. We provided feedback on a Congressional Research Service (CRS) report on TCJA last year, for example, arguing that ‘its conclusion that the TCJA has produced little to no increase in output (GDP) and its argument that investment has not increased as was expected…are too strong given the evidence.’”

The first article from the American Enterprise Institute cited by the Biden campaign was one written by Alan Viard, a resident scholar at AEI. Although Viard wrote that “a sharp uptick in investment has not occurred,” he did not conclude that the TCJA has generated no growth.

Rather, Viard posed three possibilities, only one of which considers the possibility that “the corporate tax cut is not boosting investment.” It is also possible, he wrote, that “the boost is taking longer than expected” or that “the tax cut boosted investment relative to what it would otherwise have been, even as other factors (perhaps other TCJA provisions or the trade war) have offset the boost.”

“It would be very surprising it if didn’t generate any growth at all,” Viard told us in a phone interview, adding that as a general economic principle, the corporate tax cuts should increase investment in the U.S.

Viard said that while “the growth impact may be smaller than many of us [conservative economists] thought,” it is “impossible to know” whether the law’s effects are simply taking longer than expected, or if the growth it generated has been offset by other factors, such as the trade war.

The third article cited by the Biden campaign is a blog post written for AEI by Jason Furman. But Furman is not affiliated with AEI. Furman, an economics professor at Harvard and a nonresident senior fellow at the Peterson Institute for International Economics, served eight years as a top economic adviser to President Barack Obama. According to Viard, Furman was simply invited to participate in a blog symposium about the effects of the TCJA. The symposium sought to include input from economists across the ideological spectrum.

Wrong on Heritage Foundation

As for Biden’s specific claim that “even places like the Heritage Foundation said that [TCJA] didn’t grow the economy,” the Biden campaign did not get back to us with backup for that.

But the Heritage Foundation, a conservative think tank, says that’s false.

On Twitter, Adam Michel, a senior policy analyst who focuses on tax policy for the Heritage Foundation, pointed to his Dec. 12 commentary “How 2 Years of Tax Cuts Have Supported Our Strong Economy.”

When Biden said something similar last August, Michel tweeted, “I think I’ve written something basically every week for the last year+ that says the tax cuts are working.

In a series of tweets, Jessica Anderson, executive director of Heritage Action, the lobbying arm of Heritage, also took issue with Biden’s comments, saying, “The country saw increased wage growth, business investment, and employment thanks to the law.”

In a Nov. 4 post, the Peter G. Peterson Foundation looked at what economists from various viewpoints were saying about the TCJA nearly two years after its implementation. One of its conclusions: “Economists do not agree on the economic effects of the TCJA.” Additionally, it concludes, “economists generally agree that while certain definitive trends are emerging, it is impossible to undertake a full accounting of the TCJA’s effects until more time has passed.”

“A full analysis of the effects of the TCJA will not be possible to complete for years to come, if ever,” the Peterson report states.

Biden is, of course, entitled to his opinion about the effect of the TCJA. And he has numerous economists he could cite who agree the tax cuts have, to date, resulted in very little economic growth. But he is wrong when he says that “most of the conservative think tanks” in general, and the Heritage Foundation in particular, agree that the tax cuts resulted in “virtually no growth.” In fact, they do not agree.

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