TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, November 13, 2018

NY Times: Trump’s Tax Cut Was Supposed To Change Corporate Behavior. Here’s What Happened.

New York Times, Trump’s Tax Cut Was Supposed to Change Corporate Behavior. Here’s What Happened.:

Nearly a year after the tax cut, economic growth has accelerated. Wage growth has not. Companies are buying back stock and business investment is a mixed bag.

The $1.5 trillion tax overhaul that President Trump signed into law late last year has already given the American economy a jolt, at least temporarily. It has fattened the paychecks of most American workers, padded the profits of large corporations and sped economic growth.

Those results weren’t a surprise. Economists across the ideological spectrum predicted the new law would fuel consumer spending, in classic fashion: When the government borrows money and dumps it into the economy, growth tends to accelerate. But Republicans did not sell the law as a sugar-high stimulus. They sold it as a refashioning of the incentives in the American economy — one that would unleash more investment, better efficiency and higher wages, along with enough growth to offset any revenue lost to the government from lower tax rates.

Ten months after the law took effect, that promised “supply-side” bump is harder to find than the sugar-high stimulus. It’s still early, but here’s what the numbers tell us so far:

NYT

The Investment Bump
Proponents of the tax overhaul said it would supercharge the recent lackluster pace of business spending on long-term investments like buildings, factories, equipment and technology.

Such spending is crucial to keeping economic growth strong. And strong growth is central to Republican claims that the tax cuts would ultimately pay for themselves. ...

[B]usiness spending on fixed investment — such as machinery, buildings and equipment — rose, jumping 11.5 percent and 8.7 percent during the first and second quarters. The first-quarter jump was the fastest for investment since 2011.

But that pace fizzled during the third quarter. Recently data showed third-quarter business investment rose at an annual pace of 0.8 percent. The last quarter of the year — traditionally a big one for capital spending — will fill out the picture, but that data won’t be released until early 2019.

It will likely take years to get a better sense of whether the law fundamentally reshaped American corporate investment. But there’s little clear evidence that it is drastically reshaping the way in which most companies invest and spend.

The results of a survey published in late October by the National Association for Business Economics showed that 81 percent of the 116 companies surveyed said they had not changed plans for investment or hiring because of the tax bill. ...

By Republicans’ own economic theories, it should take a while for corporate tax cuts to translate into higher worker pay. First, the cuts need to stimulate increased capital investments, which in turn raise worker productivity. More productive workers would then see their wages rise accordingly.

Productivity grew 3 percent in the second quarter of this year and 2.2 percent in the third — healthy numbers, which will need to continue apace to deliver the sort of long-term economic jolt Republicans promised.

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