"I TOLD YOU SO": It’s official: The Trump tax cuts were a bust
Lower taxes helped goose profits and stocks, but did little for jobs or the economy
Published: Jan 30, 2019 8:36 a.m. ET
marketwatch.com
Right before Congress passed the Tax Cuts and Jobs Act in December 2017, President Trump proclaimed:
“It’ll be fantastic for the middle-income people and for jobs, most of all ... I think we could go to 4%, 5% or even 6% [GDP growth], ultimately. We are back. We are really going to start to rock.”
A year later, it’s very clear that the tax cuts boosted gross domestic product and jobs a bit — and just for one year. Its effects are fading as U.S. GDP growth appears likely to weaken in 2019. The only thing that “rocked” were corporate profits and the stock market. And we’re facing trillion-dollar deficits as far as the eye can see.
The Tax Cuts and Jobs Act made small cuts in rates to most individual taxpayers, while cutting the corporate tax rate from 35% to 21%, expanding deductions for “pass-through” companies, and taxing only corporate income earned in the U.S., not worldwide. That theoretically removed a major barrier to U.S.-based multinational corporations repatriating the estimated $2.6 trillion in accumulated earnings they’re holding overseas.
Read: The slump in global trade is a bigger threat than markets imagine
Muted hiring, investment plansThe failure of the tax cut bill to achieve those intended results was made clear Monday when the National Association for Business Economics (NABE) released its January Business Conditions Survey. This is a poll of more than 100 economists employed by major firms in corporate America, so they’re hardly lefties. But they are guided by facts and hard data, not supply-side delusions.
Some 84% of these economists reported that in the year since their passage, the tax cuts “have not caused their firms to change hiring or investment plans.”
Actually, data show that firms did boost capital spending in the first half of last year, but that was fading by the third quarter. And an analysis by Daniel Alpert of Westwood Capital, reported by the Financial Times, showed that businesses put more than half of that into technology and intellectual capital, and only 28.6% in new structures and equipment, the opposite of 1998, a year when GDP grew by 4.5% and income was rising.
Buyback bonanzaSo where is all that money going? Where else? Share buybacks, which hit a record $1.1 trillion in 2018. Companies actually spent more on buybacks than on capital investments in 2018’s first half, and remember, capex weakened as the year went on. Buybacks shrink the number of shares, boosting earnings per share and eventually, the stock price. That helps all shareholders, of course, but especially corporate executives, more than half of whose total compensation is in stock.
And what happened to all the trillions of dollars the president promised corporations would bring back to the U.S.A. from overseas? That, too, has turned out to be a bust — the amount dropped 50% in the third quarter after starting out strong in the first half of 2018. See a pattern here?
As economists projected, the tax cuts did boost GDP a bit: When 2018’s final numbers are in, GDP probably will have grown 2.9-3%. That’s a nice jump from 2.2% in 2017 and the anemic 1.5% in 2016, the year Trump was elected. But it will be virtually identical with the 2.9% GDP growth recorded in 2015, the highest of the Obama years. Since economists expect U.S. GDP growth to slow to the mid-2% level this year — and some are even predicting a recession — that may turn out to be the peak of the Trump years, too.
Job growth has picked up, having risen by 2.6 million in 2018, vs. a gain of 2.2 million in 2017. It’s unclear how much of that can be attributed to the tax cut, since health care and professional and business services set the pace again, as they have for the past 30 years. As my MarketWatch colleague Tim Mullaney pointed out, the gains in manufacturing — which the president promised would go through a revival — have been pretty modest.
Booming company profitsSo, who gained? Well, corporate profits surged $78.2 billion in the third quarter, accelerating over the second quarter’s $65 billion gain. Earnings for the companies in the S&P 500 Index SPX, +1.55% probably topped $148 per share last year, about a 40% gain from the end of 2016. That’s exactly what the S&P 500 gained from just before the election to its October 2018 all-time high.
The numbers couldn’t be clearer: Corporations, big shareholders and top corporate executives reap the lion’s share of the gains from the 2017 tax cut, which should be renamed the Shareholder and CEO Enrichment Act of 2017. It didn’t boost economic growth that much, didn’t start a capital spending boom or U.S. manufacturing renaissance, didn’t bring overseas profits back home, and might have led to modest job growth but little discernible wage increases. And we’ll all be stuck with the bill for a long, long time.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold. |
