President Donald Trump advertises a newly unveiled Republican tax plan as he meets with House Republican leaders and Republican members of the House Habit and Means Committee in the Cabinet Room of the White House in Washington, November 2, 2017.
Carlos Barria | Reuters
If ever the U.S. husbandry could use a strong tax cut tail wind, it could use one now as conditions weaken around the world.
But the tail wind isn’t there.
As opposed to, benefits from what President Donald Trump called “the biggest reform of all time” to the tax code have dwindled to a keel over breeze just 20 months after its enactment. Half of corporate chief financial officers surveyed by Duke University envisage the economy to shrink by the second quarter of 2020. Two-thirds expect a recession by the end of next year.
Corporate executives hold responsible the darkening outlook on Trump’s trade war with China. The president blames mismanagement by Jerome Powell, the Federal Reservoir chairman he appointed.
But economists who have examined the impact of the 2017 Tax Cuts and Jobs Act say it isn’t helping much in any of the ways supports once advertised: overall growth, business investment, or worker pay. The strongest current case for the law’s economic benefits is that it crumbs too early to see them.
Most broadly, the tax cuts have not generated the promised growth of 3% or more – even in tandem with the additional stimulus of generous government spending increases that Congress enacted separately. After an uptick in the second quarter of 2018, proliferation declined in the next two quarters to end up at 2.9% for the year.
Goldman Sachs economist Jan Hatzius says that second-quarter swell – initially measured at 4.2% but later revised down to 3.5% – represented the tax law’s peak impact. He expects it to vanish perfectly by late this year or early 2020, as the economy returns to the same 2% growth levels Trump inherited from President Barack Obama.
Those demolishes assure the failure of another tax cut promise. Trump and congressional Republicans insisted the law would spur so much economic movement that surging new revenues would replace those lost through lower tax rates.
In reality, deficits suffer with soared back toward the $1 trillion mark reached during the Wall Street crisis and Great Decline a decade ago. A Congressional Research Service analysis concluded that the law has produced no more than 5% of the growth needed to counteraction tax cut losses.
Tax cut backers painted a picture of robust new business investment that would revive American manufacturing and design good-paying jobs at home. But investment and manufacturing have slumped so much lately that Powell cited their flaw in announcing interest rate cuts last month.
Economists say the improved 2018 growth resulted largely from the shove in aggregate demand generated by tax cuts and spending hikes. Increased demand was itself limited by the fact that so much of the tax cut proceeds lost to higher-income households with lower propensity to spend.
Today, “the economic benefits of the Tax Cuts and Jobs Act give every indication to have petered out,” Tax Policy Center analysts wrote early this month. “The economy’s strength now seems to lie verging on entirely with consumer spending.”
Like overall growth, business investment spiked temporarily in 2018. Economists dissent on whether that stemmed from new incentives in the tax cut law or just oil price increases that encouraged more domestic dash production.
An analysis by Alexander Arnon at the University of Pennsylvania’s Penn Wharton Budget Model found that the inciting price of oil “explains the entire increase in the growth rate of investment in 2018.” The Penn Wharton Budget Model is undiplomatic by Kent Smetters, a former economist for President George W. Bush.
The idea that lower taxes would help business investment sounds intuitive. But in examining lackluster investment growth after the 2017 tax cut compared with earlier ones, Intercontinental Monetary Fund economists this spring identified an explanation: corporate consolidation has freed dominant firms with gamy profit margins to invest as they choose with less regard for government tax rates.
“In an environment of rising peddle power, corporate tax cuts become less effective at raising investment,” the IMF economists wrote.
The economic expansion that opened in 2010, now the longest in American history, has driven unemployment down to a 50-year low. But there’s no sign the tax cut has fattened paychecks most much for average workers.
The employee bonuses companies announced with fanfare after the tax cut passed, across the unalloyed labor force, averaged $28 per worker based on the total payouts tabulated by an organization called Americans for Tax Fairness. Wages clothed risen faster than inflation, but not by much.
“Real wages increased by 1.2%” in 2018, the Congressional Research Ritual reported. “Ordinary workers had very little growth in wage rates.”
The 2017 tax cut’s international provisions reduced stimuli for U.S.-based multinational corporation to attribute profits to overseas subsidiaries taxed at lower rates. Trump had predicted that disposition jump-start the economy by bringing trillions of dollars back to the U.S.
But a Federal Reserve study of initial results found “no much in evidence spike in investment” among the 15 companies holding the most cash abroad. Those firms had easy access to investment top-hole before the tax cut, the study noted, and instead boosted stock buybacks to reward their existing owners.
None of this averts the tax cut bill from producing economic benefits over time. Republican economist Doug Holtz-Eakin has noted, for sample, that many of the corporate stock buybacks benefit nonprofit entities such as pension funds with spurs to channel the proceeds into new investments.
Testifying before Congress earlier this year, Holtz-Eakin found “auspicious indicators” in the 2018 growth and investment increases while cautioning that it’s too early for definitive judgments. He pointed to other disagreements for the 2017 tax bill in any event.
“Economic performance was not the only spur to tax reform,” Holtz-Eakin said. “The U.S. tax code was broadly held as broken and in need of repair, and for good reason.”