Last week, the Commerce Department released data on equipment investment for December 2018. Orders for new equipment were up just 2 percent from year–ago levels and actually down almost 2 percent from the levels reached in July 2018. In fact, even the peak level reached in July was lower than the peak reached under Obama in March of 2012, and that’s before adjusting for inflation.
The other categories of investment don’t look much better. The smaller categories of intellectual property products and nonresidential construction are both seeing modest single–digit increases. This is fine for normal times, but there is no acceleration from the growth rate we saw under Obama. In short, we clearly are not seeing the investment boom promised by the Trump administration and other proponents of its tax cut.
In case folks had forgotten, the main rationale for the tax cut was supposed to be that it would trigger a huge surge in investment. This was supposedly the reason that corporations received the bulk of the tax cuts.
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While the immediate beneficiaries of a cut in corporate taxes are shareholders, who are disproportionately the rich and very rich, the argument was that ordinary workers would ultimately be the biggest beneficiaries. The story was that lower tax rates would give corporations more incentive to invest. More investment would lead to more productivity growth. With workers getting their share of productivity growth in higher wages, the typical working family would be $4,000 better off as a result of the tax cuts, after just four years.
While we still have some ways to go to get to the four-year mark, after a year we are seeing zero evidence of their investment boom story. It is important to recognize that these data are for orders. It takes time to put investment in place, but it does not take very long to place orders. If there was going to be an investment boom because of the tax cuts, it should be showing up in orders by now.
There also is no evidence of any positive impact on productivity growth. Some of us had hoped that the tightening of the labor market, which had been going on for years before the tax cut, would lead to a pick-up in productivity growth for reasons having nothing to do with the tax cut.
When workers are scarce, employers have more reason to economize on labor. This could mean reorganizing workplaces to make them more efficient and automating tasks where possible. Whatever employers are doing in response to the tighter labor market, it is not showing up in the productivity data. Productivity has increased just 1.3 percent over the last year, the same as its pace over the last decade.
The impact of the tax cuts on investment and productivity growth is not the only prediction the tax cut promoters got wrong. It turns out that they substantially overestimated the tax revenue they would collect; or, to take the other side, they underestimated the extent to which companies would still find ways to avoid or evade taxes.
Part of the rationale for cutting tax rates was to reduce the incentive and opportunity for companies to get out of paying their taxes. While the tax rate had been 35 percent before the tax cut, very few companies paid anything close to this rate. The claim was that the 21 percent rate is considerably lower, but at least companies would pay it.
That turns out not to be the case. After the tax cut was passed, the Congressional Budget Office projected that the government would take in $243 billion in corporate income tax in 2018, but the government only collected $205 billion, almost 20 percent less than had been projected.
While the gap between the initial projection and the most recent ones are somewhat lower for later years, it looks like we will collect even less tax revenue from corporations than the Trump administration had promised. There are ways to design the corporate income tax so that we do get the intended revenue, but unfortunately, there seems little interest from either Republicans or Democrats about putting an end to tax avoidance and evasion by corporations.
In short, the Trump tax cut didn’t get us the investment and wage growth that was promised. It also didn’t eliminate the loopholes that allowed corporations to escape their tax liabilities. The only thing it succeeded in was making the very rich even richer.