A new Congressional Research Service report finds that the 2017 Tax Cuts and Jobs Act had little measurable effect on the overall US economy in 2018. And, no, the tax cuts didn’t come remotely close to paying for themselves by turbocharging the economy as President Trump repeatedly promised. This was a surprise to few, since most independent analysts predicted more than a year ago that the law would have little economic impact.
Also unsurprisingly, the 18-page paper set the economic twitterverse afire with comments. Long-time critics of the TCJA say, “I told you so.” Defenders are picking nits in the CRS report and, insisting that they never really promised a big short-term burst of economic growth in any event.
Wildly short of paying for itself
But whatever your priors in this argument, the CRS paper, written by Jane Gravelle and Donald Marples, finds little evidence that the tax cuts had any significant economic benefit. They did substantially lower effective corporate tax rates and generate a flood of stock buybacks and dividends for shareholders. But Gravelle and Marples are a lot like those who looked so hard to find Iraq’s weapons of mass destruction. They searched, but found almost nothing.
And because the TCJA did so little to boost the economy, it fell wildly short of paying for itself in growth-driven new revenue. CRS calculated that the TCJA reduced federal revenue by about $170 billion in Fiscal Year 2018, with corporations benefitting most from the tax cuts.
In fairness, the tax cuts didn’t occur in a vacuum. Some of their benefits may have been offset by President Trump’s own highly restrictive trade policy, or magnified by new deficit spending approved by Congress in 2018. But overall, as TPC predicted in December, 2017, short-term macroeconomic effects were extremely modest. This is consistent with the findings of TaxVox’s quarterly updates on the post-TCJA economy.
Surprising investment patterns
Perhaps the most interesting CRS finding was its analysis of 2018 investment patterns. While the growth of wages and consumption were very modest in 2018, capital spending grew smartly, especially in the first half of the year. But Gravelle and Marples identify a surprising phenomenon: The sectors of the economy that showed the most investment growth were those actually hurt by the TCJA.
For instance, the TCJA reduced the cost of capital for structures by 11.7 percent but investment in structures grew by a modest 5 percent, after taking inflation into account. By contrast, the TCJA raised the after-tax cost of research and development by 3.4 percent yet investment in intellectual property rose by 7.7 percent.
As the report carefully notes: “Looking at changes in the user cost of capital, effects of investments in structures would be expected to be largest, with small (or negative) effects on intellectual property. To date, this pattern has not been observed.”
Modest wage growth
What about wages? The Trump Administration, you’ll remember, made a succession of bold promises about the TCJA’s ability to drive wage growth. Over an indeterminate period of time, the White House insisted, business tax cuts would result in new investment, greater worker productivity, and, eventually, wage growth of $4,000-$9,000 annually.
Some productivity-driven wage growth may yet occur over the long term, but it certainly didn’t happen in Year One. CRS concluded the after adjusting for inflation, wages grew more slowly than overall economic output, and at a pace relatively consistent with wage growth prior to passage of the TCJA. That was especially disappointing considering that many predicted tight labor markets would result in accelerated wage growth, even without the TCJA.
Thanks to effective White House messaging, news organizations paid great attention to anecdotal stories of firms giving workers bonuses in late 2017, just as the TCJA was becoming law. But as Gravelle and Marples note, reported bonuses were equivalent to about $28 per US worker. And many were announced so firms could deduct the cost at their higher 2017 tax rate of 35 percent instead of the 2018 rate of 21 percent.
Where did the money go?
The authors estimate the one strong effect of the TCJA was its deep cut in effective corporate tax rates, from 17.2 percent in 2017 to 8.8 percent in 2018.
And, they found, multinational corporations repatriated $664 billion in foreign earnings in 2018—more than the previous three years combined—after the TCJA cut taxes on repatriated overseas earnings.
If effective corporate rates were cut in half, and firms had new access to $664 billion in overseas income, yet they didn’t spend that extra cash on wages or investment, where did it go?
CRS confirms what was well-reported at the time: Much of it went to $1 trillion in stock buybacks.
That was good news for many shareholders. But it also was evidence that companies didn’t see a way to earn significantly higher returns by investing the money in capital or labor. And that may explain, more than anything, why the TCJA’s effects on the 2018 economy are so hard to find.
