The massive $1.5 trillion tax cut package has now had one year to work its magic on the U.S. economy, but instead of an expected economic boom, some economists are calling it a bust. One of the biggest changes in the federal tax code was a reduction in corporate taxes from 35% to 21%. That was supposed to boost corporate spending and hiring plans, and contribute to U.S. economic growth, but a new survey shows there were few long-term benefits.
Few Changes to Investment & Hiring Plans
The National Association of Business Economics (1) conducted the survey at the beginning of the year. More than a hundred members responded, and of those respondents 84% said the lower tax rate has not resulted in changes to their hiring or investment plans. NABE President and Chief Economist Kevin Swift says the tax savings has had the biggest impact on manufacturing companies. He says most respondents in that sector reported higher levels of investment.
The survey also shows that corporate spending fell in January to its lowest level since July of 2017, and indicates that this spending pullback will continue through the first quarter. Some economists say the survey confirms what they had predicted — that companies would not use the extra cash in a way that would boost GDP growth. Business Times (2) calls it a failure of “trickle-down economics” because that money didn’t trickle down to anyone.
“Tax Cuts Don’t Matter Much”
Bloomberg Economics (3) also did an analysis that shows some amount of benefit from the tax overhaul. Those researchers say, “It’s not that tax cuts don’t matter. It’s that they don’t matter much.” They say the tax bill was “a real-life experiment in supply-side theory” that more-or-less failed.
Supply-siders believe that by letting corporations hold on to more of their profits, they will reinvest. Those supporting demand-side economics believe companies will spend money in response to economic conditions and demand for their products. Bloomberg says there’s one thing that both sides would agree on — that the tax package did boost profits. It reports that U.S. corporate profits were up 8% during the first three quarters of 2018, and that if data for the fourth quarter shows a similar pace of growth, it will be the strongest profit growth since 2012.
TCJA Impact on GDP
But how did the tax cut package affect the nation’s economic growth? Bloomberg economists say they based their analysis on the effective tax rate which is a more accurate portrayal of a company’s tax liability. They say it fell from 16% to 10.5% as a result of the tax cut package. That lead to a 1% boost in corporate investment, and a 0.1% increase in the gross domestic product or GDP. The GDP was 3.1% in 2018, so without the TCJA, the GDP would’ve been 3%. That’s much less of a gain than the White House had promised before the tax package was approved.
TCJA Impact on Deficit
The tax package was also supposed to reduce government expenses due to the economic growth, but that magic bullet hasn’t materialized. The CBO is reporting the opposite — that the federal deficit surged 77% during the last quarter of 2018 to $310 billion. That’s up from $176 billion a year earlier. The CBO is predicting a $900 billion deficit for this year, and a deficit of more than $1 trillion in 2022.
As reported by the Business Times (4), many economists are blaming that surge on the corporate tax cuts. Treasury officials say that tax revenue fell 2% from individual taxpayers in the fourth quarter, and 22% from corporations.
TCJA Impact on National Debt
This isn’t good news for the national debt, either. It reportedly jumped around $30 billion in January to more than $22 trillion. Business Times reports that the national debt was just under $20 trillion when President Trump took office, and the precipitous rise in debt began after the tax cuts were approved, combined with increased spending for domestic and military programs.
The Trump Administration pushed for the tax reform package, saying it would pay for itself, and reduce the national debt, because of increased economic activity. Instead, the Congressional Budget Office says the TCJA will add another $2.29 trillion to the national debt over the next 10 years.
The CEO of a think tank that focuses on the nation’s long-term economic issues says the rapid rise of the national debt is “the latest sign that our fiscal situation is not only unsustainable but accelerating.” Michael A. Peterson of the Peter G. Peterson Foundation calls it a mismatch between spending and revenue which basically means we are spending more money than we are making, thereby creating more debt. He says the rapid rise in debt is largely due to expenses associated with an aging population, the high cost of healthcare, and an increasing amount of interest the U.S. government has to pay on that debt.
The Scotsman Guide (5) spoke with Moody’s Analytics Chief Economist Mark Zandi about the Republican tax overhaul. He says it only provided a temporary economic boost that lasted about half a year. He says economic growth rates are now about what they would’ve been without those tax cuts. He said, “I don’t think the tax cut took us anywhere, did not lift growth in any significant way. But of course, it left us with a much bigger budget deficit and debt load.” He says the GDP shot up to around 4% right when the tax cuts went into effect, but settled back down to about 2 to 2.5%.
TCJA Impact on Individual Taxpayers
The jury is still out on how the TCJA will affect Individual taxpayers. Many homeowners in high tax states are paying more because of new limits on mortgage interest and SALT deductions, but there are many factors affecting individual returns. We are in the midst of the tax reporting season, so a more complete picture of the TCJA impact on individual taxpayers will be available soon.