President Trump’s trade wars have undercut the economic benefits of his tax cuts, proponents of the 2017 tax code overhaul say.
Administration officials are hoping that Trump’s newly signed trade deals will lead to the realization of the promised boost in investment from the tax code overhaul.
The tariffs that Trump placed on China, including steel and aluminum, constitute a $70 billion annual U.S. tax burden, according to the nonprofit group American Action Forum. That eliminates about half of the benefits to taxpayers from the Tax Cuts and Jobs Act, which reduced taxes by $150 billion a year, the Tax Foundation found
“The tariffs are absolutely eating into the benefits of tax reform,” said Jackie Varas, director of trade policy for the American Action Forum. “So, regardless of what tax reform took away, the tariffs added that $70 billion back.”
Economic growth last year fell short of the administration’s hopes as it wrestled with Beijing over trade, hit France with tariffs, and threatened to put levies on autos and auto parts imports. Overall gross domestic product growth was 2.3%, below the administration’s projected 3% and the softest year since Trump took office. It grew slow as the year progressed, with growth at 2.1% for the third and fourth quarters.
Of greater concern, capital expenditures have slowed.
The prime motivation for the 2017 tax overhaul was to increase U.S. business investment. It lowered the corporate tax rate to 21%, induced corporations to bring back earnings held overseas, and allowed businesses to immediately write off many investments.
Former Trump advisers Gary Cohn, who was the director of the National Economic Council, and Kevin Hassett, who was chairman of the Council of Economic Advisers, argued in a December Wall Street Journal op-ed that one of the main purposes of the tax cut was to create “incentives for more capital investment in American businesses and workers.”
Business investment initially rose in response to the bill’s passage. But, in recent months, it has slowed and turned negative, dropping 1.5% in the last quarter of 2019, 2.3% in the third quarter, and 1% in the second.
“We’ve now had … three straight quarters where business investment has fallen,” Rep. Don Beyer, a Virginia Democrat and vice chairman on the Joint Economic Committee, said. “Manufacturing has contracted for three of the last four quarters. Whatever short-term boost to the economy resulted from the tax cuts has worn off.”
“I think the biggest cause is the uncertainty generated by the president’s policies,” said Bill Reinsch, trade policy expert for international business at the Center for Strategic and International Studies.
Exports decreased $1.5 billion over the last year, and imports decreased $9.9 billion. A slowing global economy was another factor. When trade partners are growing, they can afford to buy more U.S. exports. If the international economy grows more slowly, trade slows with it. Tariffs and the uncertainty they caused exacerbated the situation.
Bryan Riley, a trade policy expert for the conservative National Taxpayers Union, said exports took a hit from the trade war in two ways. “Exports face retaliatory tariffs imposed by other governments. In addition, U.S. efforts to reduce imports have left our trading partners with fewer dollars to spend on American exports,” he said.
The tax cuts have cushioned the negative impact of the tariffs, said Clark Packard, an economist with the nonprofit group R Street, but that is wearing off. “The ripple effect from the tariffs is starting. You’re seeing it in a slowdown in manufacturing, in employment, and output,” he said. The Institute for Supply Management’s December manufacturing index was 47.2%, down a point from the prior month and its lowest reading since June 2009. December’s unemployment rate was 3.5%, having barely budged from April’s 3.6%.
The average tariff on imports is far higher today than when the trade wars started, Packard said, noting that between 65% and 70% of all tariffs of all imports from China now have an average rate of 18%, up from the 3% of before the trade wars started.
The administration is hoping that the signing of the United States-Mexico-Canada Agreement and the conclusion of “phase one” of the U.S.-Beijing deal will boost the economy in the months to come. Phase one obligates Beijing to buy $200 billion in U.S. goods and services. The White House’s Council of Economic Advisers said last week that while “the inevitable disruptions induced by trade renegotiations weighed down GDP growth,” things were on track now because “the long-run benefits from improved trade deals should far outweigh the short-run strain on GDP.”
Economists note, though, the China deal didn’t end the trade war. The U.S. still has most of its tariffs on Chinese goods in place. “The trade agreement with China was a ceasefire, a temporary halt. It’s good that we are not going ahead with more tariffs, but we don’t know that China is actually going to go ahead with those purchases,” Varas said, noting that China had failed to follow through with such pledges in the past and may not have the domestic demand to buy the $200 billion in goods and services.
