The Tax Cuts and Jobs Act was originally touted as a big win for Middle America. The large corporate tax cuts would “tickle down” through the economy, putting more money into everyone’s pocket, from CEO’s to the night time cleaning crew. In December of 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.”
One year later, the tax cut did boost gross domestic product and jobs, but that boost was much smaller than proclaimed, and the boost was only for one year. The positive effects of the tax cut are already fading as GDP growth is forecasted to weaken in 2019. The only thing that “rocked” were corporate profits and the stock market. And the mixed results of the tax cut came at a huge price, namely in the trillion-dollar deficit the country is now saddled with. The federal deficit continues to balloon out of control, and the tax cut only made things worse.
The Tax Cuts and Jobs Act made small cuts in rates for middle-class Americans, while giving corporate America a massive tax cut, reducing the rate from 35% to 21%, expanding deductions for “pass-through” companies, and taxing only corporate income earned in the US (not including income earned overseas).
The question is, did companies allow the massive tax-cuts windfall to trickle down to the employees? Unfortunately, the answer is no. A recent survey by the National Association for Business Economics (NABE) showed that a majority of economists do not expect economic growth in the 2019, and that the Tax Cut and Jobs Act did not cause their firms to change hiring or investment plans.
So if companies weren’t spending all that extra money on hiring or capital investments, where was it going? The answer is stock buybacks. Stock buybacks hit a record $1.1 trillion in 2018. The buybacks reduce the number of shares, which boosts a company’s earnings per share, and eventually increases the stock price. The extra money gained from the tax cut went to shareholders, and executives who often see part of their compensation in a company’s shares.
As many economists projected, the tax cuts did boost GDP some. 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.
Jobs growth has picked up some, but its unclear how much can be attributed to the tax cut. Most new jobs were seen in health care, professional services and business services. Gains in manufacturing have been comparably modest.
Overall, 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. The boost to economic growth was tepid and temporary, and it didn’t spark the capital spending boom that was promised. U.S. manufacturing has not been revived and companies did not bring overseas profits back home. Finally, while jobs did grow modestly, wage increases continue to remain stagnant. And we’ll all be stuck holding the federal deficit bill for a very long time.