Trading Off Health Care For Unnecessary Supply Side Tax Cuts

Republican members of the House of Representatives have taken the first step – a budget resolution – to cut taxes. The final bill will likely extend some of the regressive the tax cuts that Congress enacted under President Trump in 2017, also known as the Tax Cuts and Jobs Act (TCJA). The extension of expiring tax cuts would go to high-income households, who already sit on record high amounts of money that have not spurred innovation and growth. Extending these tax cuts would then rob the U.S. Treasury of the resources necessary to fund the government’s operations, including Medicaid and SNAP, among others. This isn’t theoretical. Cuts to vital programs for many seniors like Medicaid and SNAP are in the same bill in the House of Representatives. If enacted, House Republicans would take away health care and food from the most vulnerable, including struggling retirees, to help pay for some of TCJA extension, while still leaving large increased budget deficits.

The TCJA followed a basic but faulty supply side logic. Cutting taxes for high-income people and corporations supposedly will leave them with more money. The argument goes that high-income households are more likely to save the money than lower-income households. Those additional savings will lower the price – interest rate – on money that banks can lend out. Similarly, cutting taxes for corporations will mean that they can more easily recover money from an investment project, which will incentivize more investments in new technology, manufacturing plants, fuel efficient car parks and so on. It will also reduce demand for loans since they keep more of their own money, reducing interest rates. Lower interest rates will spur investments and set off an economic growth spurt. That investment burst will raise demand for workers and increase their productivity, both of which will lead to the benefits of the tax cuts to trickle down to workers in the form of more jobs and higher wages. In fact, Trump’s leading economist, Kevin Hassett, argued that the 2017 tax cuts would give workers a bump of $4,000. The logic never played out that way in reality.

High-Income Households’ Increased Liquid Reserves Reflect Unused Investment Opportunities

Before discussing the data on business investments, household finances are worth a look. Supply-side economic logic says that high-income people will see greater savings following the tax cuts. The Federal Reserve quarterly releases estimates of household wealth. The average liquid holdings – checking accounts, money market mutual funds, savings accounts and such — of households in the top 20% increased by $84,685 – a 24.7% jump — from $376,495 in December 2017 – when the Trump tax cuts were enacted – to $461,180 in September 2024, the last quarter for which data are available (see Figure below). The fact that the growth of liquid reserves outpaced inflation, even during a period of higher inflation, over the past few years suggests that high-income households gained the means to invest more.

Corporations Increased Their Cash Holdings Amid Much Higher After-Tax Profitability

Corporations already sat on trillions of liquid reserves – money they can quickly turn into longer-term investments – back in 2017. Federal Reserve data show that non-financial corporations – the overwhelming share of corporate businesses – sat on $5.4 trillion (in 2024 dollars) in liquid reserves, or 10.4% of all of their assets by the end of that year.

Let’s fast forward to 2024. In September 2024, the last quarter, for which data are available, corporate liquid reserves amounted to $8.0 trillion or 12.8% of all nonfinancial corporate assets. Corporations are sitting on an even bigger pile of money than they did back in 2017, while investment has been relatively flat as share of GDP over the past few years.

Business Investment Did Not Accelerate A Lot After the Trump Tax Cuts

Business investment could have soared after people got more money. On the other hand, high-income households ended up sitting on ever larger piles of cash, possibly showing their reluctance to invest more. Investment as a share of GDP stood at 13.6% by the end of 2017, after gradually rising through the previous two years (see Figure below). The same share stood at 13.7% by the end of 2019, just before the pandemic hit (see Figure below). Since then, investment has averaged 13.5% of GDP. It is hard to detect an acceleration of business investment in the years immediately following the Trump tax cuts, even ignoring the immediate impact of the pandemic in 2020 and 2021.

Innovation and economic growth depend on businesses investing more. Net business investment – the money businesses spend to expand their capital after accounting for their investments to replace obsolete buildings and equipment – is at a relatively low level. For the entire business cycle since the end of 2019, net business investment has averaged 2.6% of GDP, on par with the period between the start of the Great Recession and the pandemic. Those levels are the lowest of any business cycle since World War II. In other words, businesses are adding very little new capital and thus are only slowly laying the foundation for faster innovation and economic growth. The academic literature on the impact of the tax cuts confirms that investments indeed increased somewhat after the tax cuts, but not on the scale promised beforehand.

Workers Saw Few Benefits From The Tax Cuts

It should go without saying that the presumed benefits of supply side tax cuts could only materialize if the first step – faster investment growth – happened. In fact, year-over-year wage growth after the tax cuts looked similar to the wage growth before the tax cuts. Data from the Bureau of Labor Statistics (BLS) show that throughout 2019, which reflects the experience after the tax cuts, average inflation-adjusted wage growth was at similar levels was at or below the wage growth recorded in 2015 and 2016 (see Figure below). Moreover, BLS data on total employment show that year-over-year job growth 2019 was below that of the year before the TCJA went into effect (see Figure below). In fact, academic research shows a modest gain of well below $1,000 for workers – the bulk of which went to the top 10% of wage earners in firms that received tax cuts –, rather than the promised $4,000 wage bump for the average worker.

The tax cuts, which were explicitly built on an overwrought supply side argument, ended up being wasteful blowing a massive hole in the federal budget by sharply reducing the revenue it received. These data points serve to remind policymakers that letting many of the past tax cuts under TCJA expire and not adding more in the same vein will not hurt the economy. After all, if the cuts did not help, the inverse also has to be true, that letting them go is not going to have an adverse impact. More bluntly, extending wasteful tax cuts for the wealthiest households expire would starve vital programs such as Medicaid and SNAP of the money they need to support struggling families.