For all the hype about more take-home pay, new corporate investment, and bonuses in the wake of the Tax Cuts and Jobs Act (TCJA), what can we really say about how the landmark tax bill is affecting the US economy? So far, evidence of its impact has been limited but the results seem to be a modest positive—pretty much as the Tax Policy Center and other independent analysts predicted.
Last December, just as Congress was passing the TCJA, TPC estimated the macroeconomic effects of the TCJA and the resulting feedback effect on revenues. TPC projected that the tax cuts would boost Gross Domestic Product by 0.8 percent in 2018, by somewhat smaller amounts over the following few years, and by very little after 2025. The analysis relied on TPC’s newly developed macro modeling capacity.
Three months into the new year, how do those predictions look? For the most part, “it’s too soon to tell”.
Just a few months after enactment, we’d expect most of the economic impact to be through increases in demand for goods and services as households spend some of their tax cuts, inducing firms to ramp up production and hiring. Effects of TCJA on the economy’s overall productive capacity – the positive effects of increased incentives to work, save, and invest and the negative effects of higher budget deficits—will occur only gradually, over time.
We have seen only a few releases of official government statistics on overall economic performance since the law’s enactment. For example, GDP is measured only on a quarterly basis, with initial estimates not available until about a month after the quarter ends. Thus, we will have no snapshot of how the tax cut has affected the overall economy for more than another month. Other pieces of economic data, such as employment and consumer spending, are released more often, but can be volatile and may provide inconsistent evidence.
Finally, it is important to remember that the effects of changes to government policy are typically small relative to underlying economic developments, making it difficult to tease out those effects from noisy economic data. Moreover, a precise estimate of the effects of the TCJA would require knowing exactly what the economy would have looked like if the law hadn’t passed—something we can never be sure about. As a result, we won’t be able to identify the TCJA’s effects with certainty even after we’ve seen all the data.
All that said, we have seen some indications of positive effects from the TCJA. Consumer confidence is high and the tax cuts have increased disposable income. However, those developments have not yet translated into strong retail sales. Business confidence also is high, and there are some indications that manufacturing and other industrial activity is strong, although factory orders remain relatively soft.
The labor market appears strong, with unemployment claims down and employment growth robust. Although that largely represents an extension of trends seen over the previous year, unusually strong employment gains in February suggest the possibility of faster growth going forward. Increases in short-term market interest rates, as well as the Federal Reserve’s target interest rate, could reflect anticipation of near-term growth. However, those developments also continue trends from 2017, and would generally be expected at this point in the business cycle.
Overall, the evidence thus far is broadly consistent—or at least not inconsistent—with a modest boost to growth in 2018. Pretty much what TPC and most others forecast.
But those effects, even if confirmed by subsequent evidence, are largely temporary and will last a few years at most.
The long-run effects of TCJA on economic output due to changes in work effort, saving, international capital flows, and investment were the primary selling points of the law. Estimates of those effects are more uncertain—projections by different analysts differ substantially—and we won’t see the evidence in economic statistics for years.
Measures such as stock prices and long-term interest rates could provide an indication of market expectations of long-run effects, but the evidence to date is ambiguous. We’d expect the TCJA to boost stock prices because it cut corporate income taxes, even if there was no positive effect on the economy. And right now stock prices are a bit below where they were when the TCJA was enacted. Of course, the boost to stocks should have occurred earlier, as markets incorporated the increasing likelihood that the bill, or something like it, would become law. And other factors, such as changes to trade policy, have undoubtedly contributed to the behavior of stock prices. Long-term interest rates have risen since TCJA was enacted, though one would expect a big boost to the capital stock to lower the rate of return to capital, and therefore interest rates, in the long run. However, the observed increase could reflect other factors, such as near-term economic strength, actions of the Federal Reserve, and the anticipated crowding out effect of increased deficits.
Even once all the economic statistics are available, more significant—but impossible to predict—economic developments, technological advances, and policy changes will muddle the story. Ten years from now, we likely still will be debating the benefits of the TCJA.
