WASHINGTON — President Donald Trump’s pre-pandemic economic blueprint of massive tax cuts and global trade wars not only failed to deliver the promised spike in growth and domestic investment, it also now appears to have left the U.S. more vulnerable to the devastating financial impact of the coronavirus outbreak.
Even before the pandemic pushed the U.S. into what is almost certainly a recession, benefits from Trump’s policies on taxes and trade were largely offset by the costs of soaring national debt and damage to U.S. foreign relations — challenges now magnified by the health crisis.
“The lasting legacy is a bigger deficit and higher debt (as a share of the economy), which means what we’re doing in response to the pandemic is piling on something that was already a pretty big mess,” said Joel Prakken, chief U.S. economist at IHS Markit.
The Tax Cuts and Jobs Act — Trump and the GOP’s 2017 tax overhaul — is estimated to cost the federal government at least $1 trillion in lost revenue over 10 years, according to various government and private estimates.
Individual tax rates were lowered through 2025, but by far the costliest feature of the law was a permanent cut in the U.S. corporate income tax rate to 21% from 35%.
The lower corporate tax rate, plus the elimination of taxes on most foreign business income, would make the U.S. more competitive globally, it was argued. With the tax savings, companies would ramp up domestic investments. U.S. multinational firms would repatriate cash stashed overseas and invest domestically, and it would discourage a flight of capital to offshore destinations, ultimately benefiting workers in America.
But economists widely agree that the tax cuts, while providing a small stimulus to growth particularly in 2018, failed on its core objectives.
Instead of ramping up capital spending and investments or turning away from offshoring, many U.S. companies focused on hiking dividends and buying back their own stock, which chiefly benefited high-income investors. Buybacks hit record levels in 2018 and remained strong in 2019.
Far from leaping ahead, the U.S. economy continued its long-running but modest recovery from the Great Recession of 2008-09.
Economic growth picked up in 2018 to 2.9%, but fell back to 2.3% in 2019, about the average growth over the last decade and far below the 4% promised by Trump and some of his officials.
As for incomes, some workers saw gains but for most, it was a continuation of long-term stagnation of personal incomes and financial security.
“What was really holding back investment wasn’t cash constraints of companies that were paying too much taxes, but was rather this overall weakness in demand,” said Kimberly Clausing, an economics and tax policy expert at Reed College.
As for dampening offshore investments, research has shown evidence the opposite happened. The tax overhaul included several new provisions that actually made it more desirable for U.S. multinational firms to invest in tangible assets overseas because that would give them a bigger tax break.
From the outset, many economists questioned the wisdom of enacting deficit-financed cuts at a time when the economy was growing at a steady pace.
Almost always in the past, the federal government used massive tax cuts only during downturns, when they could give the economy a much-needed lift in consumer and business spending.
“At the time, it seemed just a little bit heinous that we should be running a near-trillion-dollar deficit while we were more or less at the top of the business cycle,” said Nicholas Eberstadt, a political economist at the American Enterprise Institute.
Not only did the tax cuts not deliver the benefits Trump and congressional Republicans promised, they left the country with a big budget hole that just got much bigger from the once-in-a-century economic shock of the pandemic.
“It was a huge mistake that we’re now seeing because we now have less fiscal room than we would have to fight this current crisis,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.
He noted, for example, that it’s no longer an option to offer certain tax incentives for businesses to invest and stimulate the economy, such as full expensing for new plant and equipment purchases, because it was already included in the 2017 law.
Goldwein estimated that without the 2017 tax cuts, the country would have an extra $500 billion to fight the current health and economic crisis. While that may not seem like a lot compared with the $3 trillion already approved in pandemic relief by Congress, it will make a difference in the future, he said.
“As time goes on, the structural deficit may kind of create extra fatigue that makes it harder for us to support the economy,” Goldwein said. “And allowing us to spend an extra $500 billion for more support for the economy, that would be a big deal.”
On the trade front, some economists say the gains in business investment promised from the tax cuts did not materialize in part because of uncertainty created by Trump’s nearly two-year-long trade war with China.
After months of on-again, off-again negotiations and several rounds of tit-for-tat tariffs, the U.S. and China announced a trade deal in January in which Trump got some of what he sought, at least on paper. Beijing pledged to step up its purchases of U.S. goods and services by more than $200 billion over two years.
But the so-called Phase 1 deal put off for a later day such critical issues as China’s policies of subsidizing and supporting its state-owned enterprises.
Many analysts said at the time that China was unlikely to follow through on the promised increases in purchases, including of U.S. soybeans and other farm crops that have been hit hard by the trade wars.
Now the COVID-19 pandemic has made such massive purchases even less likely.
The pandemic has severely disrupted global trade and supply systems. And the ill-will created during the last two years of trade friction with China — as well as with many allies, including Germany and Canada — left the U.S. in a worse-off position when the pandemic hit.
Most immediately, the trade tensions complicated Washington’s ability to secure critical surgical masks, goggles, gloves and other protective gear, much of which originate in China.
N95 masks were among products from China hit with 15% tariffs in September. Those tariffs were halved when the U.S.-China trade deal took effect Feb. 14, but it wasn’t until March 17 that the remaining duties were removed, said Chad Bown, a trade expert at the Peterson Institute for International Economics.
“They got caught up in the trade war,” Bown said. “That obviously hurts your preparedness when something like this happens.”
Trump can claim credit for having renegotiated the North American Free Trade Agreement, and while his tariffs on many products from trading partners helped lift some domestic manufacturers like steel firms, the benefits sometimes didn’t last and there was considerable collateral damage to other industries.
“It’s not like he accomplished nothing, but they were significantly offset by the cost,” said William Reinsch, a veteran trade analyst and senior adviser at the Center for Strategic and International Studies.
What’s more, economists worry that Trump’s America First strategy will prove to be costly in terms of responding effectively to the intertwined challenges of health and the economy.
“The entire world is fighting the same thing right now,” Bown said of COVID-19, “and in a sense we’re never going to be safe until the pandemic everywhere is under control. So the idea that we’re going to somehow insulate ourselves from the world by only worrying about us right now is very short-sighted.”
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