Hosts
Derek Thompson
Derek ThompsonAbout the episode
The tax and spending bill passed by House Republicans last week is the sort of bill that does so many different things that even budget experts could be forgiven for not realizing just how many different parts of the economy it will change.
In the realm of workers’ comp, the bill would eliminate taxes on overtime pay and tips. In terms of families, it would create new $1,000 savings accounts for children and give parents an extra $500 per year per child, in the form of an expanded child tax credit. In the realm of health and the culture wars, it would ban the use of Medicaid funds for gender-affirming care and cut funding for Planned Parenthood. In the realm of climate, it would claw back half a trillion dollars of investments in wind, solar, geothermal, batteries, nuclear power, clean hydrogen, and electric vehicle purchases. In the realm of defense, it would increase spending by over $100 billion on shipbuilding, air and missile defense, immigration enforcement, and border security.
But judging strictly by the sheer dollar amount of the provision, this bill is really about three big things. Number one, it extends a multitrillion-dollar tax cut on corporate and individual income. Number two, it reduces federal spending on two major government programs by a combined $1 trillion: Medicaid, the government health-care program for those with low income, and SNAP, or federal spending on food stamps. And number three, because of the mismatch I just told you about, between the tax cuts and the spending cuts, it will increase the national debt by several trillion dollars over the next 10 years.
Today, we have two guests. First, the University of Chicago economist Eric Zwick joins to talk about the corporate tax cut. And second, to understand how to think about the debt picture, I talk to Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
If you have questions, observations, or ideas for future episodes, email us at PlainEnglish@Spotify.com.
Summary
In the following excerpt, Derek talks to Eric Zwick about Trump’s new budget bill.
Derek Thompson: So I want to talk to you about the new tax and spending bill that just passed the House, the centerpiece of which is the extension of the 2017 Trump tax cut. You are one of the co-authors of one of the best studies of what that tax cut actually did, which I think makes you one of the better people to ask: What will this law actually do? So when you go back to 2017, it seems to me like there were two very strong camps debating this Trump tax cut. The proponents of the Trump tax cut said, “This thing is going to boost investment, it’s going to raise wages, it’s going to increase growth.” And then there were critics, mostly Democrats, and they said, “No, it’s mostly just going to increase the deficit and help rich people.” We’ll get to the specifics in a second. We’ll get as nerdy as you need to get in just a moment. But first, at a high level, who was right?
Eric Zwick: So I would say 30 percent, 20 percent the first camp, there was some growth, and then 70 percent, 80 percent the second camp, there was redistribution and deficit. And I think it comes back to separating what changed in 2017 into what happened for individuals, the individual tax code, wages and other types of income that people earn. Those tax rates went down a lot and there were a lot of changes—child tax credit, other changes there on the individual side. That was mostly the temporary stuff that was slated to expire and that was being extended and renewed in this most recent bill. That stuff was very expensive. That stuff was primarily stimulative in the same way that sending people checks is stimulative. They spend more money if it’s in their pockets. And we could talk about how doing it then is different from doing it now, given the macro environment.
And then the second part is the corporate changes, which were made largely permanent, not all. And those are maybe more likely to generate growth, although at considerable expense. So there was a reduction in the income tax rate on corporate income, increases in incentives to buy equipment, machines, changes in how we treat research and experimentation expenditures, a bunch of changes on the international side that we can get into in more detail. Some of those things seem to be fairly growth-enhancing, some at a quite low bang for buck. So for every dollar spent on a corporate income tax cut, you get some back in growth, but it’s not that big relative to the sort of direct mechanical costs. But that’s where some of the growth, I would say, would come from.
Thompson: So let me split my follow-up question into the effect of this law on companies and then the effect of the law on individuals. First, with corporations, did you find that companies with larger declines in their effective tax rate, like the folks who got the biggest tax cut, did they in fact invest more?
Zwick: Yes. I will say we also want to keep in mind two groups of firms there. One is the large multinational—think Caterpillar, think IBM, also Facebook, Google, Walmart, these types of companies. Those are companies listed on the stock market. And then there’s the closely held pass-through businesses that are regional, have a few owners: an auto dealer, a beer distributor, or even a law firm. And we were focused on that first group, the bigger companies, and we did see significant investment response to the tax cuts, specifically firms that got larger tax cuts there did more investment.
For the pass-throughs, we excluded those from our analysis because we were interested in thinking about multinationals. But other folks have looked at the pass-throughs and generally find smaller effects. I think that’s relevant for thinking about what’s going on in the current reform because the pass-through things are slated to expire and they’re going to be renewed. And if anything, those are more expensive on a bang-for-buck basis and even more aggressive than corporate income tax cuts.
Thompson: And then on wages for individuals, from your paper you said the business tax provisions increased economic growth and wages by less than advertised by the act’s proponents. Why don’t you just expand on that a little bit? Why did this enormous 2017 tax cut not have a particularly large effect on long-run GDP or labor income?
Zwick: I think it was advertised to have a very large effect on wages, on the order of $4,000 to $9,000, which is something like—depending on how you measure the median—a 10 percent increase in income. That’s like, first approximation, you could think of it, they’re saying that GDP is going to be 10 percent bigger or the economy is going to be 10 percent bigger because of this. And even if it generates a lot of investment, you’re just not going to see that kind of change in the size of the economy from this tax cut. So our estimates suggest more like a 1 percent increase in income over more like five to 10 years. So taking a while. And that’s because, initially, firms have to kind of grow and they do more investment, but they get bigger deductions. And until they’ve gotten that growth, they’re not really paying people much more because they don’t have the higher productivity. So it takes kind of a while to materialize and it’s still just like a 1 percent change in GDP over that period. And that corresponds to our estimate of what happens to wages.
So I think just the elasticity is basically the predicted effect on investment from this tax change that the proponents were suggesting were a bit aggressive when you take into account the capacity constraints of the economy, when you take into account sort of bidding up of interest rates or other things like that, that crowding out and take into account the relative size of the firms that do a lot of investment, those big multinationals, the firms that do a lot less in the overall economy. It was just unlikely to see economic growth at that size.
This excerpt has been edited and condensed.
Host: Derek Thompson
Guests: Eric Zwick and Maya MacGuineas
Producer: Devon Baroldi