WASHINGTON — President Donald Trump cited massive tax cuts, his signature legislative achievement, among wins that should dissuade lawmakers and voters from supporting his impeachment.
Congressional Democrats reject out of hand that Trump’s policy agenda has anything to do with the misconduct at the heart of their impeachment push. But more ominously for Trump’s re-election prospects, several conservative economists now say the law, which turns 2 years old Sunday, so far has fallen short of its central promise to spread prosperity broadly.
“I was certainly expecting to see something different,” Alan Viard, an economist with the right-leaning American Enterprise Institute, said of a business investment boom that hasn’t materialized. “Really, you would have expected, if there’s an effect taking place here, you would have seen it.”
Boosters of the package predicted it would set off a virtuous trickle-down effect. The cuts, they said, would compel businesses to invest in their operations. In theory, that would boost their productivity, ultimately yielding higher wages for workers.
Here’s how the right-leaning Tax Foundation envisioned the process playing out in 2018: A lower corporate tax rate reduces capital costs. That results in greater business investment and capital stock, boosting productivity. Greater output eventually leads to higher wages.
Instead, the first step in that daisy chain largely hasn’t come to pass. Business investment has contracted over the past two quarters, falling 3 percent over the three-month period that ended in September — the steepest such drop since 2015.
Economists surveyed by the Wall Street Journal named the development as a top disappointment this year.
Defenders of the tax cut say Trump’s trade war cast a pall of uncertainty over the economy, spooking business leaders into shelving any big spending plans they may have been contemplating. That, these economists say, makes it impossible to draw firm conclusions about how the tax cut would have performed without the fear unleashed by the trade war. Some argue the falloff in business investment would have been even worse — and that it could still recover if Trump winds down the trade hostilities next year, or that it needs more time to play out.
At some point, however, the numbers speak for themselves. “We haven’t seen a huge investment boom. That was validating for a lot of folks on the center-left,” said Garrett Watson of the Tax Foundation. “That’s just an accurate description of where we are.”
Some conservatives say the partisan process that yielded the tax cuts, and their underperformance and poor public polling since have helped embolden aspiring Democratic leaders to propose dramatic tax hikes. Nicole Kaeding, vice president of policy promotion at right-leaning National Taxpayers Union Foundation, recently tweeted that when Trump signed the law two years ago, she “did not fully appreciate just how far left it would push the 2020 tax debate in the [Democratic] primaries.”
Watson said Trump officials’ hyperbolic claims about the boom times the tax cuts would unleash also hurt their own cause. The Tax Foundation for example projected the measure could juice economic growth to 2.7 percent — but White House officials publicly touted a pace nearly twice as brisk. “We’ve been clear that should not have been expected, and it does not do proponents of tax reform any favors,” he said.
But economists critical of the law say the results make clear that theory behind the tax cuts was fundamentally broken from the start. “There’s just no shortage of business capital. You can see that by looking at interest rates,” said Edward Kleinbard, a former chief of staff of the congressional Joint Committee on Taxation, now a professor at the University of Southern California Gould School of Law. “In a world where we are awash in capital, to say we now have a tax environment that’s friendlier to business investment is no more convincing than pushing on a string.”
Whatever the combination of reasons, polls show the tax cuts have remained broadly unpopular with voters. And the package does not appear to be improving with age.
A new report by the left-leaning Institute on Taxation and Economic Policy found 91 corporations in the Fortune 500 paid no federal taxes last year. And about 400 of the largest firms paid an average tax rate of 11 percent, half the burden prescribed by the tax law.
“Many companies said a big drop in corporate tax rates would allow them to invest more in capital and equipment, but the uptick in new investment appears to have been short-lived,” The Washington Post’s Jeff Stein and Christopher Ingraham wrote recently. “Much of the extra capital went into record stock buybacks, which increase share prices without requiring new investment or hiring.”