The Trump tax cuts courtesy of the 2017 Tax Cuts and Jobs Act (TCJA), are set to expire this year; Republicans want them to stay, and Democrats aim for their demise. Like any landmark legislation, economists offered their two cents, determining whether they were successful and if they are still needed.
The Trump Tax Cuts Case
Billionaire financier Scott Bessent told lawmakers he came out from behind his desk to tackle “the single most important economic issue of the day.” Should Congress fail to leave the TCJA intact, the federal government could trigger an “economic calamity” resulting in financial “instability that falls on the middle and working class.”
Rep. Jason Smith (R-MO), chairman of the House Committee on Ways and Means, touted the importance of certainty for families and small businesses, preventing a surprise massive tax bill. He warned that not extending the law would cause a $4.6 trillion tax hike, with much of it falling on the backs of workers.
“Without action, workers’ paychecks one year from today will look drastically different as they fork over even more to Uncle Sam," Smith said in a statement before his committee's January 14 hearing.
Democratic lawmakers disagreed with the positive characterization of the TCJA.
Rep. Richard Neal (D-MA), the Ways and Means Committee ranking member, accused the other side of borrowing $2 trillion to pay for the first phase of the TCJA and claimed it would add another $4 trillion to the deficit by making it permanent. “I don’t understand the logic of suggesting that we’re going to attack the national debt and simultaneously add $4 trillion to it by a tax cut proposal,” he said.
Neal’s colleagues in the upper chamber framed the TCJA as being a handout for the affluent, arguing that it was heavily skewed toward the rich. This prompted Sens. Elizabeth Warren (D-MA) and Raphael Warnock (D-GA) to ask Bessent: “Is there any billionaire rich enough that you would not support a tax cut for going forward?” Bessent refrained from answering the loaded question.
Political grandstanding is normal. But what do the experts and numbers say?
Examining the Past and Future
Did the TCJA fuel the budget deficit or increase federal tax revenues? Did the TCJA create jobs and boost wages? Did it bolster economic growth? Did it benefit everyone or just the rich?
Let’s look at the official US government data before exploring what the experts say about the future.
When the TCJA was enacted, federal revenues stood at $3.514 trillion. At the end of fiscal year 2024, tax collections were $5 trillion. Put simply, Uncle Sam's receipts have risen by approximately $1.5 trillion, up 42%, from 2018 to 2024. On the labor front, employment levels rose from 147.667 million in January 2018 to 152.309 million in February 2020. Real (inflation-adjusted) hourly wages increased 5%, cumulatively, in 2018 and 2019. As for tax policy, the top 1% now pay 46% of all income taxes, up from 37% in 2016. The top 10% pay 76% of all income taxes, up from 70% in 2016. The bottom 50% pay 2% of all taxes, down from 3% in 2016.
Now, what are the expectations if the TCJA is made permanent? Projections vary.
Republicans held a press conference on Capitol Hill to highlight a new study by the National Association of Manufacturers (NAM). The NAM report estimates that if the TCJA is not extended, the economy would lose $540 billion in wages. Researchers warn that the GDP would suffer a $1.1 trillion loss.
The Joint Committee on Taxation projected that the individual tax aspects would boost the average GDP growth rates by 0.5% while lowering federal revenues by $3.4 trillion from 2025 to 2035. Oxford Economics believes renewing the Trump tax cuts would stimulate consumer spending in 2026 and 2027 and potentially offset his tariffs, but argue it would bolster higher-income household consumption most. “By lowering federal income tax, higher earners will see a larger increase in after-tax income, while increased tariffs will raise prices for all consumers,” wrote Alex Mackle, corporate advisory engagement lead at Oxford Economics, in the report.
The Tax Foundation expects the TCJA will lift the GDP by as much as 0.7% and increase the number of full-time jobs by 800,000 over the next ten years. “We estimate an initial GDP boost of 0.7 percent in 2026 that falls to 0.6 percent by the end of the budget window, which is driven by lower tax rates increasing labor supply offset over time by less capital formation mainly because of the cap on state and local tax deductions,” said William McBride, chief economist at the Tax Foundation.
The Congressional Budget Office (CBO), the nonpartisan budget watchdog that Democrats and Republicans both love and hate depending on what they are advocating, criticized the TCJA. CBO economists stated that allowing the Trump tax cuts to expire at the end of the year would benefit the economy in the long term. This, the CBO noted, is because while higher marginal tax rates will weigh on growth in the coming years, lower deficits would boost growth due to less federal borrowing and higher private investment.
Economists call this the crowd-out effect. Put simply, if the federal government keeps borrowing by tapping into capital markets to manage its deficits and higher interest costs, it will erode private domestic investments.
Who’s Right?
Econ 101 will say that lower taxes stimulate economic growth. The Laffer curve, which has become integral in introductory economics courses, explains that a lower optimal tax rate can help juice the economy and raise government revenues because more people are working and spending. This was on display before the coronavirus pandemic. However, when Washington is running a $2 trillion deficit, spending $1 trillion on interest payments, and issuing trillions in new debt, can tax cuts be enough to plug the shortfall, lower interest costs, and pay down the national debt? Supporters of Trump 2.0 say this is the last chance the US can grow out of its tsunami of red ink.
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