Economy strong thanks to Trump tax cuts, CBO report shows
Earlier this week, the Congressional Budget Office released their Budget and Economic Outlook report for 2019 to 2029.
While media reports focused on the $3 billion that CBO estimates was permanently lost by the partial government shutdown (equal to 0.02 percent of projected annual GDP in 2019), the real story should be that the tax cuts (TCJA) and other economic policies of the Trump administration have been successful. For American families this means more jobs, higher wages and increased take-home pay.
Although the current strength of the economy is clear, the CBO report argues that the benefits of tax cuts will not last and that the economic growth will average just 1.7 percent between 2020 and 2029. Democrats, such as House Budget Committee Chairman John Yarmuth, D-Ky., seized on this estimate as proof that the tax cuts will eventually fail.
This prediction should not be cause for concern, the full benefits of tax reform are not felt immediately, as investments are made looking years into the future.
There is still work to be done on tax reform, such as extending expiring provisions in the law. In fact, a study by the Heritage Foundation found that making some of these provisions permanent would double the economic benefits of the law in the long term.
While it was 31 years between TCJA and the last time comprehensive tax reform was passed, there are tax bills signed into law every year or two, so the long-term strength of the economy largely rests on these proposals.
Stronger economic growth will also improve the nation's fiscal health. CBO has found that 0.1 percent in revenue equals 1.4 percent in GDP growth and over $400 billion in revenue over a decade, and in the past they have stated that 0.1 percent in GDP equals $300 billion. This means that economic growth of 2.5 percent instead of the 1.7 percent predicted by CBO will net the federal government trillions of dollars in higher revenues over 10 years.
Regardless of what may happen in the future, the CBO report confirms that the economy today is strong.
Real disposable income is expected to grow by 2.9 percent in 2018 while consumer spending is expected to grow by 2.7 percent.
Growth of Real Business Fixed Investment (measured as purchases of equipment, structures and IP) increased by 14.9 percent in 2017 and is projected to increase by 9.6 percent in 2018.
Each of these numbers mark a sharp contrast with the economic policies of the Obama administration, which saw average annual GDP growth of 1.9 percent compared to the 3.1 percent seen in 2018.
This positive economic news should not be a surprise. TCJA implemented numerous, pro-growth reforms.
It reduced the corporate tax rate to 21 percent (or 26 percent after state taxes) making it competitive relative to the 23.7 percent average rate among developed countries that make up the Organisation for Economic Development (OECD). Tax reform also created a 20 percent deduction for the 28 million businesses organized as pass-through entities (including LLCs, sole proprietors and S-corporations).
One-hundred percent expensing of new assets was implemented for five years, incentivizing businesses to invest in new equipment. The legislation also moved the U.S. closer to a territorial system of taxation where businesses are no longer double taxed on their income and can compete on the global stage.
As a result, hundreds of billions of dollars have already returned to the U.S. to be reinvested in the economy.
Because of these reforms, the U.S. economy has been named the most competitive economy in the world, according to the World Economic Forum.
Small business optimism and manufacturer optimism has reached record levels, according to a survey by NFIB and the National Association of Manufacturers respectively.
More than 2.6 million jobs were created in 2018 and unemployment has hit record lows for several demographics including women, African-Americans and Hispanics.
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The number of Americans filing unemployment claims is at a 49-year low, and job openings hit a record high in August of last year.
Alex Hendrie is director of tax policy at Americans for Tax Reform, a free market advocacy organization dedicated to lower taxes and limited government.