Trump’s tax cut isn’t giving the US economy the boost it needs

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If ever the U.S. economy could use a strong tax cut tail wind, it could use one now as conditions weaken around the world.

But the tail wind isn’t there.

Instead, benefits from what President Donald Trump called “the biggest reform of all time” to the tax code have dwindled to a faint breeze just 20 months after its enactment. Half of corporate chief financial officers surveyed by Duke University expect the economy to shrink by the second quarter of 2020. Two-thirds expect a recession by the end of next year.

Corporate executives blame the darkening outlook on Trump’s trade war with China. The president blames mismanagement by Jerome Powell, the Federal Reserve chairman he appointed.

But economists who have examined the impact of the 2017 Tax Cuts and Jobs Act say it isn’t helping much in any of the ways advocates once advertised: overall growth, business investment, or worker pay. The strongest current case for the law’s economic benefits is that it remains too early to see them.

Most broadly, the tax cuts have not generated the promised growth of 3% or more – even in tandem with the additional stimulus of large government spending increases that Congress enacted separately. After an uptick in the second quarter of 2018, growth declined in the next two quarters to end up at 2.9% for the year.

Goldman Sachs economist Jan Hatzius says that second-quarter surge – initially measured at 4.2% but later revised down to 3.5% – represented the tax law’s peak impact. He expects it to vanish altogether by late this year or early 2020, as the economy returns to the same 2% growth levels Trump inherited from President Barack Obama.

Those levels assure the failure of another tax cut promise. Trump and congressional Republicans insisted the law would spur so much economic activity that surging new revenues would replace those lost through lower tax rates.

In reality, deficits have soared back toward the $1 trillion mark reached during the Wall Street crisis and Great Recession a decade ago. A Congressional Research Service analysis concluded that the law has produced no more than 5% of the growth needed to offset tax cut losses.

Tax cut backers painted a picture of robust new business investment that would revive American manufacturing and create good-paying jobs at home. But investment and manufacturing have slumped so much lately that Powell cited their weakness in announcing interest rate cuts last month.

Economists say the improved 2018 growth resulted largely from the boost in aggregate demand generated by tax cuts and spending hikes. Increased demand was itself limited by the fact that so much of the tax cut proceeds went to higher-income households with lower propensity to spend.

Today, “the economic benefits of the Tax Cuts and Jobs Act seem to have petered out,” Tax Policy Center analysts wrote early this month. “The economy’s strength now seems to lie almost entirely with consumer spending.”

Like overall growth, business investment spiked temporarily in 2018. Economists disagree on whether that stemmed from new incentives in the tax cut law or just oil price increases that encouraged more domestic energy production.

An analysis by Alexander Arnon at the University of Pennsylvania’s Penn Wharton Budget Model found that the rising price of oil “explains the entire increase in the growth rate of investment in 2018.” The Penn Wharton Budget Model is directed by Kent Smetters, a former economist for President George W. Bush.

The idea that lower taxes would boost business investment sounds intuitive. But in examining lackluster investment growth after the 2017 tax cut compared with earlier ones, International Monetary Fund economists this spring identified an explanation: corporate consolidation has freed dominant firms with high profit margins to invest as they choose with less regard for government tax rates.

“In an environment of rising market power, corporate tax cuts become less effective at raising investment,” the IMF economists wrote.

The economic expansion that began in 2010, now the longest in American history, has driven unemployment down to a 50-year low. But there’s no sign the tax cut has fattened paychecks very much for average workers…….Read More>>

 

Source:- cnbc