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The U.S. economy's strong 2018 performance happened without much health from the massive tax cut President Donald Trump ushered through the previous year, according to a study released this week.
An in-depth look by the nonpartisan Congressional Research Service indicated that not only did the rollbacks in business and personal rates have little macro impact, but they also delivered the most benefits to corporations and the rich, with little boost to wages.
In all, GDP rose 2.9% for the full calendar year, the best performance since the financial crisis. But that came in an economy already poised to move higher, economists Jane Gravelle and Donald Marples wrote.
"On the whole, the growth effects [from the cuts] tend to show a relatively small (if any) first-year effect on the economy," the report said. "Although examining the growth rates cannot indicate the effects of the tax cut on GDP, it does tend to rule out very large effects in the near term."
Trump had touted the cuts as a key step toward generating GDP growth of at least 3%. The legislation, passed in late 2017, slashed corporate tax rates from 35% to 21%, reduced the number of brackets, lowered rates for many individual payers, and doubled the standard deduction in an effort to make most income tax-exempt for the lowest earners.
Employment continued to boom in 2018 and average hourly earnings have in recent months passed 3% on a year-over-year basis for the first time since the recovery began in 2009. However, the economists said wage gains could not be tracked to the tax cuts.
"This growth is smaller than overall growth in labor compensation and indicates that ordinary workers had very little growth in wage rates," the economists wrote.
The study indicated that the tax changes contributed only marginally to the overall economic economic gains — maybe 0.3% of a "feedback effect." The economists say that for the tax cuts to pay for themselves, as Trump has promised, GDP would have to rise by 6.7%.
"The initial effect of a demand side is likely to be reflected in increased consumption and the data indicate little growth in consumption in 2018," the report said. "Much of the tax cut was directed at businesses and higher-income individuals who are less likely to spend. Fiscal stimulus is limited in an economy that is at or near full employment."
At the same time, tax receipts from 2018 indicate that corporations got an even bigger break than expected.
While the Congressional Budget Office had forecast a $94 billion break that still would have generated $243 billion in corporate revenues, the actual total was $205 billion, or 16% lower than projected.
The effective tax for corporations, or the level they pay after taxes, was 17.2% in the year before the tax breaks took hold and plunged to 8.8% for 2018. Individuals, meanwhile, saw a drop from 9.6% as a percentage of personal income in 2017 to 9.2% last year.
Bonuses from those companies also didn't amount to much when averaged across all workers, with the $4.4 billion paid coming to just $28 per employee in the U.S.
Companies also received incentives to repatriate profits held overseas, and they did so to the tune of $664 billion. While companies bought back about $1 trillion of their own shares, "the evidence does not suggest a surge in investment from abroad in 2018," the report said.
The White House did not immediately respond to a request for comment.