The White House and Republican Congress skewed the tax cut toward big corporations. The decline in the top corporate tax rate from 35 percent to 21 percent was expected to “boost economic activity, lead to higher investments and economic growth, and ultimately help bolster wages for working Americans,” as economist Aparna Mathur of the right-leaning American Enterprise Institute wrote in a recent study and blog post.
It didn’t. The investment surge didn’t occur. Although investment did increase, gains were modest and had started during the Obama administration. Most increases preceded passage of the Tax Cut and Jobs Act of 2017, said Mathur, a supporter of the original tax cut.
In a front-page article on Nov. 17, the New York Times reported that its analysis had reached a similar conclusion. Companies received sizable tax relief but didn’t invest most of it. Large amounts went to dividends and share buybacks. Indeed, in the third quarter of 2019, business investment in machinery, computers, buildings and factories dropped at a 3 percent annual rate, said the Times.
The significance of these findings is that they almost certainly will be echoed in political debate, before and after the election. Democrats have cast corporate tax cuts as a giveaway for the wealthiest — the people who least need it. (Corporate stock ownership is concentrated among the rich, who would most benefit from higher dividends and stock buybacks. By shrinking the number of outstanding shares, buybacks are intended to raise a company’s share price.)
To some extent, the Republican tax theory has been road-tested — and found wanting. Similarly, the Democratic theory has also been road-tested — and found to fit the facts more closely. The debate is likely to repeat itself in the presidential campaign and the next administration.
If lower taxes didn’t stimulate more corporate investment, then the converse may also be true: Raising taxes on the rich won’t kill the economy. If the rich feel squeezed, they could offset the effect by spending a bit more of their wealth. Ironically, Trump’s misguided corporate tax cuts have made the super-rich more vulnerable to higher taxes than they would have been.
Still, just what explains the disconnect between lower corporate taxes and higher business investment is unclear. In her studies, Mathur makes some suggestions.
One is more time; the effects are felt over longer stretches than a year or two. Another is complexity; the 2017 tax law contains some arcane provisions that raise corporate taxes and may have discouraged some firms from increasing investment. (Have you heard of the Base Erosion and Anti-Abuse Tax, known as BEAT? That’s one of the obscure tax increases.) Another possibility is Trump’s trade wars, which might have left some trade-sensitive industries with surplus capacity.
It’s also true that Trump’s tax overhaul has changed some corporate practices. One objective was to limit the amount of profits U.S. firms retain abroad. Lower tax rates seem to have achieved that goal, even if the proceeds so far haven’t triggered an investment boom.
What we may learn is that the patterns of corporate investment depend on a long list of influences — the state of the business cycle, interest rates, new technologies, tax rates, government regulations, public confidence and the global economy — that vary over time and can’t easily be compressed into a simple formula that works permanently.
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