The Viability of Trump’s Tax Cuts

It is no secret that Trump’s tax cuts are seen as something positive by most of us on the right. From the common right-wing, laissez-faire approach to economics, tax cuts are obviously great for both companies and workers, but why is this?

The answer is neoliberalism, or what’s commonly called supply-side economics and trickle-down economics (if we want to go by political “BS” terms). The logic this ideology holds is that tax cuts let businesses keep more of their profit, leading to an increase in corporate reinvestment, leading to more R&D and innovation, which leads to more competition and supply being created (and therefore also leads to more workers to produce this supply). These proponents use this logic to justify Trump’s tax cuts, but using empirical data, it is evident that this logic doesn’t hold up.

Did Trump’s Tax Cuts Increase Corporate Reinvestment?

Well, according to the U.S. Bureau of Economic Analysis, it really didn’t. If you compare current business capital expenditure (capex) with capex from the past two years, it looks great. If you compare these capex gains with the gains in historical expansions or earlier in this very expansion, they’re OK.

It should also be noted that the recovery of capital spending came on the heels of a rare, nonrecession decline in capex. This is due to the retrenching of the oil/gas industry because of price drops. The nonrenewable industries’ recovery brought a massive boost in capex that you wouldn’t see in other situations. Proponents of the tax cuts have to ask why the capex recovery hasn’t been great, especially with a huge boost by the oil/gas industry recovering during the same time?

“Excluding energy and oil investment, investment growth is still below five percent on a year-by-year basis…lower than the typical expansion average”

Rafael Bostic, President of the Federal Reserve Bank of Atlanta

Another piece of evidence that corporate reinvestment isn’t increasing is contained in American factories. American factories aren’t relishing a surge of new orders, as orders for durable goods (excluding volatile defense and aircraft) are at the same level as October and remain lower than the 2014 spike. It is clear that manufacturing orders are at the same velocity since 2016.

According to a poll by the National Association for Business Economics, a majority of respondents indicated the Tax Cuts and Jobs Act did not cause their firms to change hiring or investment plans. Even the respondents that did change plans didn’t necessarily change these plans because of the tax cuts, as some plans could have been changed by the other major part of the act, the tariffs.

“I don’t see us having a massive acceleration in capex”

Matt Ellis, Verizon’s CFO

The Other Effects of Trump’s Tax Cuts

There was one major side effect these tax cuts had, explained in two words: increased buybacks. For those tax cut proponents looking for an economic boost on “Main Street,” most of the tax savings have gone to “Wall Street,” the shareholders, investors, and capitalists, through the form of share buybacks and increased dividends. Goldman Sachs predicted that share buyback authorizations among all US companies in all of 2018 will surpass $1 trillion for the first time ever.

Buybacks have completely exploded, and Apple is a great example of this phenomenon. It currently has plans to buy back $100 billion of its own stock. This is good news to Apple shareholders (buybacks tend to push stock prices even higher) but this asset-price inflation hasn’t trickled down to the middle class. Even in industries where investment is picking up, like tech, buybacks completely outpace it.

Limitations to My Criticism

It’s possible the spending boom is just delayed for a multitude of reasons: lack of workers, trucker shortage, rising raw material prices, current trade policies, and/or paying down debt. Share buybacks have also provided much-needed stability on Wall Street, and there were some wage hikes and one-time bonuses for workers.

Conclusion

The assumption that the tax cuts were good for the economy is wrong. As shown by manufacturing orders and capital expenditure data, it is clear these tax cuts did not increase corporate investment and reinvestment. The main effect of the tax cuts were increased buybacks and share dividends, showing the tax cuts led to the benefit of the “1%,” not the workers. The tax cuts just led to an increase in the concentration of wealth in the upper classes, and the middle class didn’t benefit.

“[corporations] bought back shares, a few gave out bonuses; there’s no evidence whatsoever that the money’s been massively poured back into the American worker”

Senator Marco Rubio (R-FL)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s