April 19, 2018 Steve Wamhoff

Director of Federal Tax Policy

April 19, 2018

President Trump and his allies in Congress have made many wild claims about economic growth that would result from the Tax Cuts and Jobs Act. And the Congressional Budget Office just released a report revealing the TCJA will, in fact, create economic growth — for foreign investors.

The mind-numbing details are explained in a letter the agency sent to Sen. Chris Van Hollen, D-Md. Over the coming decade, 43 percent of the growth in economic output resulting from TCJA will flow to foreign investors rather than Americans. This figure is projected to vary from year to year, and in 2028 it will reach 71 percent.

While CBO’s letter does not go into detail about why this will happen, the reasons behind its projections are clear enough. We already know that a portion of the tax cuts will go to foreign investors who own stocks in American corporations and therefore benefit from TCJA’s cut in the U.S. corporate income tax. This year alone, ITEP estimates that foreign investors will receive $47 billion in benefits from TCJA, which is more than the bottom three-fifths of Americans will receive this year.

But the even more important element that CBO hints at is foreign holders of U.S. debt. The new tax law increased the deficit by $1.9 trillion over the coming decade, which means it is financed with Treasury bonds that pay interest. A lot of those bonds are held by foreigners. So even Americans who benefit from the tax cuts should think about how, one way or the other, they may eventually foot the bill for interest payments that will go to foreign investors.

CBO had buried this in its numbers, and it’s not clear anyone would have noticed if Sen. Van Hollen had not dug into it.

CBO had already published projected growth in Gross National Product (GNP) and Gross Domestic Product (GDP) resulting from TCJA. GDP is basically income generated in the United States, whether it is going to Americans or foreign investors, whereas GNP is just income going to Americans. The difference between the two is the part of economic growth going to foreign investors, which comes to 43 percent of the total over the next 10 years.

The bottom line is that anyone who thought President Trump was serious when he declared a policy of “America First” should be feeling awfully disappointed right now. He apparently meant high-income Americans and foreign investors first, everyone else last.