We shouldn’t declare Trump’s $1tn tax cut a failure just yet
(This post originally appeared on The Guardian)
Earlier this week a new report from the National Association for Business Economics said that the 2017 Tax Reform Act had no major impact on how US businesses invested or hired.
The report concluded that the number of businesses who said they do not plan to accelerate their investments rose to 84% from 81% a quarter earlier. In fact, spending plans from businesses fell to their lowest levels since July 2017. Employment growth did improve, but only modestly, with just a third of the respondents saying their employment at their firms grew this quarter compared to 31% the previous quarter.
The good news is that the most of the survey’s 106 business economists who belong to the association and who responded to the survey do not expect a recession within the next 12 months. Nearly two-thirds – 64% – of respondents expect expansion. But the damage was done and opponents of the bill pounced.
“So far, the investment response has been modest and underwhelming,” Owen Zidar, an economics and public affairs professor at Princeton, told CNN. “The idea there would be an enormous boom was pretty optimistic.”
It was not great news for supporters of the bill. But hold on …
The takeaway from everyone is that the 2017 tax cuts, which cost the economy approximately $1.5tn according to some estimates, have failed. But did they?
As someone who runs a business and serves hundreds of other business owners in the trenches, I think the naysayers are lowering the coffin lid on the measure a little prematurely, and there are two big reasons why.
For starters, we’re not going to fully know the full impact of the 2017 tax reform on people’s 2018 taxes until people actually do their 2018 taxes!
What I mean is this: the tax reform didn’t actually take effect until the 2018 calendar tax year. Most of the employees I know didn’t take the time to adjust their withholdings to take advantage of the package’s lower rates or the increased standard deductions and many small business owners continued paying in their tax estimates throughout 2018 as planned.
Why? Mainly because the tax rules required them to do so and their accountants were hesitant to suggest any big moves until certain rules – particularly the huge 20% pass-through deduction – were clarified … which didn’t happen until just last week! I predict that many individuals and small businesses, once they file their 2018 returns in the spring and summer of 2019, will find themselves with more cash in their pockets and will use that cash to spend, save and invest. Oh, and then we will see that repeat itself over the next few years as people adjust to a lower tax environment. Just watch.
The other reason doesn’t have to do with how those corporations who saw their bills cut spent their savings. The real question is … when?
Analysts have concluded that a great many publicly held corporations took their projected savings from the tax reform bill and used it to buy back their stock which in turn helped shore up the stock market and increase shareholder value. That’s what happened in 2018. But the tax reform package doesn’t expire at the end of 2018. This isn’t a one and done deal. This is a long term reduction in taxes.
Making the very safe bet that tax rates won’t rise at least through the next election cycle, large corporations and small businesses can now look at another two years of much lower tax rates. With large stock buybacks in the rear mirror, where else will this money be spent but on capital and labor?
Don’t believe me? Already the National Federation of Independent Businesses said in January that the percentage of business owners who reported that they increased employee compensation continued at 45-year record high levels and that 61% of owners reported capital outlays. Of those making expenditures, the NFIB said that 42% reported buying new equipment, 25% acquired vehicles, and 15% improved or expanded facilities. I think they’re just getting started.
Unfortunately, the biggest thing getting in the way of the Trump administration’s tax cuts is the Trump administration itself.
Donald Trump’s behavior, and tweeting, and threats to major trading partners, and his using a federal shutdown as a bargaining chip, and his outrageous games with the Federal Reserve and the congressional investigations looming over his administration’s past practices has served to create so much uncertainty (and disgust by many of my clients) as to almost offset all the positive things he has done for the business community, such as reducing regulations and taxes.
That’s the reason why the Federal Reserve, according to the Washington Post, reported in January that businesses in many regions are becoming less optimistic (and therefore less likely to make long term investments) because of a “host of adverse developments, from plunging stock prices to uncertainty about a widening trade war”.
Putting all that aside, the people who are judging the results of the tax reform package are doing so way too soon. You can’t evaluate a massive change in any government program after such a short period. These things require time to be absorbed into the longer term plans of companies and organizations that are impacted and needs to be judged as such.
In my opinion, once a few years are behind us, we will see that the 2017 tax reform package was substantially beneficial for both large and small companies, so long as the president doesn’t get in the way of its benefits.