The Congressional Research Service (CRS) recently released a preliminary analysis of the economic effects of the 2017 Tax Cuts and Jobs Act (TCJA). Traditionally, CRS produces solid, non-partisan analysis, but this has long not been the case in tax policy, of which the most recent report is but the latest example as illustrated by four erroneous or slanted statements appearing on just the first page.
The first and most obvious example is the report’s assertion “the growth effects tend to show a relatively small (if any) first-year effect on the economy.” This after noting gross domestic product (GDP) grew 2.9% in 2018, which the report suggests, was “about the Congressional Budget Office’s (CBO’s) projected rate” published in 2017. The intended implication is tax reform did little to raise the growth rate above previous projections.
On the contrary, the CBO’s 2017 projected 2018 growth rate as indicated in Table 7 of their June “Update to the Budget and Economic Outlook: 2017 to 2027” was 2.0%. At 2.9%, and therefore nearly a full percentage point higher, the 2018 result was substantially higher than the previous CBO projection.
To be fair to the CRS report’s authors, one cannot state definitively what caused the economy to so substantially outperform the CBO projection. Rather than TJCA, the greater impetus might have come from the ongoing effects of President Trump’s counter-regulation revolution, unwinding some of President Obama’s more punitive efforts in this area. Of course, the report’s author probably didn’t want to go there, and had nowhere else to turn analytically, so all they could do was pretend there was nothing to see, to pretend there really was little (“if any”) additional growth.
The tax cuts contained in the Tax Cuts and Jobs Act were never expected to be the real driver of additional economic growth. Substantial and sustained stronger growth was to come from reducing the tax burden on capital achieved mostly through a combination of significant statutory tax rate reductions and substantial improvements in cost recovery.
Over time, this reduced tax on capital then produces a significantly higher level of productive capital employed. However, it takes time, some years, in fact, for business investment to ramp up to increase the capital stock consistent with the new tax law.
Unable to deny the investment data, the CRS report admits “investment grew significantly” in 2018, as tax reform advocates anticipated. But then the report suggests the investment patterns “did not appear to be consistent with the direction and size of the supply-side effects one would expect.”
Investment accelerated in 2018 and the CRS authors don’t understand the pattern, and so they conclude not that their understanding is limited, but that the pattern suggested TJCA was not the cause. In a rapidly changing, dynamic economy, it is sheer folly to suggest one can anticipate the individual trajectories of investment in various asset classes.
These were the most obvious indicators the CRS report reflected an agenda other than unbiased analysis. A subtler and sillier indicator, was in a single number -- $1.5 trillion. The CRS report indicates this was tax reform’s Joint Tax Committee 10-year score. The actual score was $1.456 trillion. Typically, in rounding such a figure one would round down to $1.4 trillion, not up.
On the matter of foregone revenues, it’s worth observing the substantial additional growth achieved so far has already significantly reduced tax reform’s net cost. According to recent analysis by former Senator Phil Gramm et al, the additional growth the CRS report worked so hard to dismiss has already generated about $1.1 trillion in revenue feedback.
The final, but again subtle, example of the inherent bias in the CRS report is found in the title. The legislation, P.L. 115-97, is commonly referred to as the Tax Cuts and Jobs Act, or TCJA. The CRS report’s title instead refers to the “2017 Tax Revision”, as though this were just another minor bill that squeaked through the Congress. TJCA was the most important, most pro-growth reform of the federal income tax system in three decades. CRS analysts will find it harder and harder to argue the contrary, though they will no doubt try.