This tepid rate of growth means that the tax cut is unlikely to pay for itself. By this point, almost all economists recognize that income tax cuts no longer stimulate the economy enough to reduce deficits, as supply-siders thought they would back in the 1980s. But economists still held out some hope that lowering the corporate tax, which is believed to be more harmful than the personal income tax, would have a more salutary effect on the budget. Unfortunately, that hope appears to be fading, as fiscal deficits increase rapidly.
There’s still the possibility that Trump’s tax reform will bear fruit in the long term. But early results are pointing to another possibility — that tax cuts have run their course as an economic policy.
In the postwar period, with top marginal income tax rates at more than 90 percent, it made sense to cut taxes as a way of improving the economy’s long-term health. A series of big tax cuts, under presidents Lyndon Johnson and Ronald Reagan, might have boosted economic activity in their day. But the later tax cuts by George W. Bush were followed by years of underwhelming growth, implying that income taxes were no longer doing much damage to economic efficiency.
Corporate taxes were really the last hope for the tax-cutting strategy. But if even that doesn’t provide more than a small momentary fiscal stimulus, then we’ve reached the end of that approach’s usefulness.
