Checking In On The 2017 Tax Cut
Kanab, Utah (I’m Back!)
November 19, 2020
We know the theory. Tax cuts put more $s into companies’ and consumers‘ pockets — temporarily. Those companies and consumers invest the “found” $s in new equipment and new/expanding businesses, thereby creating more jobs. As a result the economy and GDP grow.
I have never been quite sure it works that way. If there were jobs to be created and investments worth making, people and companies can find the funds Is my thought.
Now if you want to argue the federal government spending Should be decreased and we match that savings with reduced taxes, I’m all in. Where do we start always seems to be the obstacle to those cuts though. I did my part by retiring!! 🤪
Which leads to the question about the 2017 tax cuts - have they and are they having the expected results? I’ve read a number of articles and I found this one to be among the most balanced.
I promise Im not trying to rile up anyone! When I managed Covanta’s investments in power plants, we would annually update our long-term financial models to compare actuals against the numbers we used to make the investment. It was a great way to review what we got right - and what we got wrong. I was usually pretty happy with the results - we easily blew through most of our initial IRRs.
Tgats what I was looking for here - is the tax cut having the effects we were told it would.
Enjoy the article:
Background on the outfit that prepared the report.
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The Tax Cuts and Jobs Act (TCJA) reduced tax rates on both business and individual income, and enhanced incentives for investment by firms. Those features most likely have raised output in the short run and will continue to do so in the long run, but most analysts estimate the modest effects that offset only a portion of revenue loss from the bill (table 1).
So far the TCJA has likely influenced the economy primarily by raising demand for goods and services. Cuts to individual income taxes mean that most households have more after-tax income, which they are likely to spend. In addition, provisions such as allowing the expensing of some capital investment may have increased investment spending by firms. As businesses see more of their goods being purchased, they respond by ramping up production, boosting economic output. Growth in 2018 rose to 2.9 percent, from 2.4 percent in 2017, likely due largely to the effects of TCJA on demand. However, growth slowed back down to 2.3 percent in 2019.
Those short-run effects have likely been limited, however, for two main reasons. First, much of the tax cuts flow to higher-income households or to corporations, whose stock tends to be held by the wealthy. Higher-income households tend to spend less of their increases in after-tax income than lower-income households. Second, the tax cut was enacted at a time when unemployment was low and output was near its potential level. Therefore, the increase in demand has been offset by tight monetary policy, as the Federal Reserve held interest rates higher than they otherwise would have been to avoid rising inflation.
In the longer run, the TCJA is likely to affect the economy primarily through increased incentives to work, save, and invest. Reductions in individual income tax rates mean that workers can keep more out of each additional dollar of wages and salary. That will encourage people to work more hours and draw some new entrants into the labor force. However, those reduced rates are scheduled to expire at the end of 2025; after that, there is little or no tax incentive to increase work.
Lower individual tax rates, a lower corporate tax rate, expensing of capital investment, and other reductions in business tax rates will increase the after-tax return to saving, encouraging households to save and reducing the cost of investment for firms. Those changes will lead to more investment, a larger capital stock, and higher output, by most estimates.
The increased investment must be financed by a combination of private saving, public saving (or government budget surpluses), and net lending from abroad (which could take the form of bond purchases, portfolio investment, or direct investment of physical capital). Most analysts, consistent with empirical research, estimate that private saving will rise only modestly in response to an increase in the after-tax rate of return. And the bill reduces public saving, by increasing the deficit. Therefore, much of any increase in investment from TCJA is likely to be financed by net foreign lending. That will increase the future interest and profit payments that flow to foreigners, reducing the resources available to Americans. For that reason, in examining the effects of TCJA it may be more illuminating to look at changes in gross national product (which subtracts that type of payment) rather than gross domestic product (which does not). For example, the Congressional Budget Office estimates that TCJA will boost GDP by 0.6 percent in 2027, but—taking account of increased payments to foreigners—GNP will be up by only 0.2 percent.
It’s too soon to judge what TCJA’s long-run impact on investment will be, but so far there is little evidence of a strong effect. Investment rose in 2018, but research by the IMF suggests that increase stemmed mostly from the short-run boost to demand. Supporting that notion, a Congressional Research Service analysis found that the types of investment that rose in 2018 were not those whose costs were reduced most by TCJA (as one would expect if the increases were driven by long-run cost factors rather than short-run demand).
Updated May 2020