Trump Tax Cut Extension Won't Pay for Itself: Analysis

Happy Thursday!

President Joe Biden commemorated the 80th anniversary of D-Day at an event today in Normandy, France, where he sought to use the occasion to warn against a rising tide of American isolationism and urge continued support for Ukraine in its war against Russia’s invasion.

“To surrender to bullies, to bow down to dictators is simply unthinkable,” Biden said. “Were we to do that, it means we’d be forgetting what happened here on these hallowed beaches. Make no mistake: We will not bow down. We will not forget.”

Here’s what else is happening.

Trump Tax Cut Extension Will Not Pay for Itself: Analysis

Although some of the more enthusiastic true believers continue to insist that tax cuts pay for themselves through higher growth, the economic data has long proved otherwise. As policymakers gear up for a fight over the expiration of the 2017 Trump tax cuts at the end of next year, a new set of analyses bring that point home once again.

Reviewing reports and comments from five different sources, analysts at the nonpartisan Committee for a Responsible Federal Budget found that an extension of the Trump tax cuts would have a fairly modest effect on economic growth, with an estimated change in long-run output in a range between a 0.5% reduction and a 1.1% increase. The result would be just a trickle of extra tax revenue, equal to between 1% and 14% of the cost.

One reason for the modest effect on growth is that tax cuts set to expire in 2025 are largely for individuals, while the corporate tax cuts included in the 2017 tax law, which theoretically have a larger effect on growth, were permanent and thus not part of the extension analysis. Another reason is that the extension of the tax cuts will increase the debt overall, which most economic models assume affects growth negatively.

“While almost no tax cut would pay for itself,” the analysts at CRFB write, “the dynamic effects of extending the TCJA would be particularly modest due to the composition of the expiring tax cuts and the high economic cost of growing the national debt.”

Chart of the Day: A Costly Tax Break for Wealthy Households

One of the 2017 tax cuts set to expire at the end of 2025 is a 20% pass-through deduction that allows the owners of common business types including partnerships, S corporations and sole proprietorships to significantly reduce their tax bills. The deduction was included in the Trump tax law to give a break to business owners who did not benefit from the reduction of the corporate tax rate from 35% to 21% — a significant number of people, given that more than half of all business income in the U.S. passes through businesses that allow owners to report revenue as personal income.

Arguing against the extension of this particular provision, analysts at the liberal-leaning Center on Budget and Policy Priorities note that according to the Joint Committee on Taxation, the majority of the tax benefit from the pass-through deduction in 2024 will accrue to households that earn more than $1 million a year. Extending the rule would cost an estimated $700 billion over 10 years.

“The 2017 Trump tax law was skewed to the rich, eroded the revenue base, and failed to deliver its promised economic benefits,” CBPP’s Chuck Marr, Samantha Jacoby and George Fenton write. “Few provisions of the law exemplify these flaws better than the 20 percent pass-through deduction, and policymakers should reject any efforts to extend the provision when it expires in 2025.”

Quote of the Day: Congestion Pricing Comes to a Screeching Halt

“I think it makes it harder when Chicago or San Francisco or L.A. can’t point to New York City and say ‘They implemented congestion pricing and it worked out. It’s harder to say ‘Look at Stockholm or Singapore or London,’ because invariably people will say ‘Well, it worked in London, but will it work in the U.S.?’”

Nicholas Klein, an assistant professor of city and regional planning at Cornell University, quoted in a Washington Post article examining why New York Governor Kathy Hochul, a Democrat, abruptly and “indefinitely” delayed a controversial congestion pricing plan that was set to take effect in New York City later this month. The plan, which called for drivers entering lower Manhattan to pay a toll of $15 or more, was meant to ease traffic, deliver climate benefits and help raise revenue for public transit needs. But opponents of the plan decried the cost to suburban commuters.

Hochul said she made her surprise, 11th-hour decision out of concern that the plan would have unintended consequences and could hurt the city’s economic recovery from the pandemic. But the politics of the move are also undeniable, as Democrats worried that the congestion pricing plan could hurt them in key House races in the New York metropolitan region.

It’s not clear now where the state might find the estimated $1 billion in annual revenue the toll plan was expected to generate. It’s also unclear whether congestion pricing has any future in the United States, though transit advocates vow they will keep fighting for it.

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