The GOP tax law passed in 2017 was supposed to super charge the economy, but the lack of major impact is spurring critics to renew their attacks against the signature measure from President Trump.
Republicans said the tax law would help the economy through several avenues, including by sending business investment soaring. But just 15 months after it took effect, business investment has actually been contracting, falling 1 percent and 3 percent in the past two quarters.
Republicans who supported the tax law are blaming Trump’s trade war with China as the reason why it failed to have the intended impact.
Critics, however, say it reflects a broader misjudgment about how the tax law was structured.
“Donald Trump and Republicans justified their massive giveaway to wealthy multinational corporations by claiming that it would boost investment and the benefits would trickle down to workers,” said Sen. Ron Wyden (D-Ore.), the top Democrat on the Senate Finance Committee.
“Two years later, none of their promises have been fulfilled. Investment is flat and workers have not seen the wage increases they were promised,” he added.
Slashing the corporate tax rate and restructuring the tax code, supporters said, would incentivize businesses to invest their money back into the U.S. economy, buying up equipment, buildings and software to accommodate more workers and make them more productive
Lowering income taxes, they argued, would also leave Americans with more money to spend, providing an economic stimulus.
But economists say that stimulus has worn off, helping to explain the falling economic growth rate since last year.
And while there was a small boost in business investment right after the tax cuts passed, research at the Center for American Progress (CAP), a left-leaning think tank, found that the boost was minor or insignificant when averaged over several quarters.
“That was part of the explanation from the GOP about why the tax cuts would lead to jobs, because of this process where increased tax savings businesses would have would then be invested, which would lead to greater productivity,” said Alex Thornton, Senior Director of Tax Policy at CAP.
“A drop in business investment means the types of economic activities that generate jobs and higher pay and innovation are not happening as fast,” she added.
Republicans who supported the law say a decline in investment doesn’t mean the law was a failure.
“There’s a lot of different factors in play. I don’t think the tax bill is the dominant one. I think overall it’s helped contribute to a lot of economic growth and a lot of job creation,” said Sen. John Cornyn (R-Texas).
“I think the headwind is because of the trade dispute primarily. I think the tax law is working well,” he added.
Congressional Republicans have been at loggerheads with President Trump over his trade wars, which economists agree have created deep uncertainty in the business environment and could account for fluctuations in investment.
Leaders such as Senate Finance Committee Chairman Sen. Chuck Grassley (R-Iowa), also blame the trade war, and say that even money brought back into the U.S. that was not invested in business is still good for the economy.
“Don’t forget, $1 trillion of the $2 trillion that we had parked overseas has come home, so in some way that’s being invested in the United States. Even if it’s invested in buying back stock, it’s still in the economy on this side of the ocean instead of across the ocean,” he said.
Democrats have hammered the GOP over the massive spike in stock buybacks that was funded by companies using their tax windfall.
Stock buybacks, which are not considered a business investment, tend to raise the price of remaining shares for other stockholders rather than spur economic activity.
Thornton says the buybacks were a symptom of companies having plenty of access to capital before the tax law passed.
“One thing it shows is that businesses didn’t have enough opportunities they wanted to invest in, perhaps because they’ve already invested in them. They were awash in cash before the tax law,” she said, noting low interest rates and an abundance of capital.
Republicans such as Sen. Mitt Romney (Utah), who only joined the Senate after the tax law was in place, argue that it did plenty of good regardless of the business investment numbers.
“Looking at the overall numbers, the overall trend is pretty attractive,” Romney said.
“Inversions have basically stopped as a result of the tax law. That’s a good thing and has helped create a low unemployment level and rising incomes,” he said, referring to the phenomenon of U.S. companies moving their headquarters abroad to avoid taxation.
Doug Holtz-Eakin, president of the right-leaning American Action Forum and a former Congressional Budget Office director, says it’s difficult to tease out precisely what in the economic data is attributable to the tax law.
“I would predict there would be thousands of PhD dissertations done on the tax law and its effect on business investment,“ he said.
All in all, though, he notes that growth has been robust and unemployment low. That doesn’t mean the tax law will keep the economy buzzing into 2020, however.
With a drop in investment, the main engine driving the economy is consumer confidence. The split between healthy household spending and a nervous business sector isn’t sustainable, he says.“That can’t last forever,” he said.
Either businesses right themselves to cater to the strong household sector, or the household sector will stop spending as the business sector starts to affect people’s pocketbooks. The decrease in productivity growth last quarter, he noted, was a worrisome sign worth watching.
If the economy does falter, Democrats heading into the 2020 election will be primed to point to the tax law as a failure. Wyden dismisses arguments that the trade war is to blame.
“The disastrous trade war is a convenient scapegoat for the failures of their tax bill, which has not delivered for middle-class families,” he said.