Ignore the Markets – Taking Stock of Tax Reform

COMMENTARY Markets and Finance

Ignore the Markets – Taking Stock of Tax Reform

Apr 9, 2018 2 min read
COMMENTARY BY

Former Senior Policy Analyst, Grover M. Hermann Center

Adam N. Michel focused on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center.
The long-run trend will ultimately tell the economic story. Kuzmik_A/Getty Images

Key Takeaways

The early evidence shows that tax reform is indeed contributing to more new jobs and higher wages for working Americans.

Congress should not lose sight of the long-run economic opportunities afforded by tax reform that could be squandered by other economic policy mistakes.

What we can say at this point is that tax reform helped America regain a competitive advantage for business investment, and businesses are indeed investing.

So, with the first quarter of 2018 behind us, what’s the word on the big tax cut passed in December? Is it “crumbs,” as Nancy Pelosi declared? Has it launched the U.S. in to the next Great Depression, as a Washington Post column predicted?

Far from it. In fact, the early evidence shows that tax reform is indeed contributing to more new jobs and higher wages for working Americans.

More than 450 companies to date have announced bonuses, pay raises, and better benefits - including American Airlines, AT&T, Bank of America and Comcast.

Fiat Chrysler announced it will move some of its manufacturing plants in Mexico back to the United States. The company will invest more than $1 billion in its Detroit plant, which will create 2,500 jobs.

“It is only proper that our employees share in the savings generated by tax reform and that we openly acknowledge the resulting improvement in the U.S. business environment by investing in our industrial footprint,” the company’s CEO said.

Tech giant Apple, also announced it will invest $350 billion and add 20,000 employees over the next five years.

It’s not just big companies that are sharing the love. A small Wichita business gave each of the company’s five employees bonuses, ranging from $3,000 to $6,000. “We are a family environment,” said President and CEO Bob Aldrich. “My crumbs are a little bit better than Pelosi thinks.”

Even if your company did not immediately raise your wage or hand out a large bonus, the Treasury Department estimates that about nine out of 10 Americans should have larger paychecks thanks to lower tax rates, a larger standard deduction, and an increased child tax credit.

The anecdotal evidence that tax cuts are benefiting American workers is encouraging, but there’s more to the story. If we take a step back to make a more sober assessment of the economy, a similar story emerges.

Planned business investment is at levels unseen since the early 1980s, according to the Philadelphia Federal Reserve. Similar measures of investment around the country are also soaring. Small business optimism is at record levels, including planed compensation and capital spending increases. More business investment means more jobs and higher wages in the future.

A healthier business environment increases demand for workers. Unemployment is at a 17-year low, and a growing number of out-of-work Americans are finding jobs, as the labor force participation rate continues to increase.

The U.S. lowered its corporate tax rate to encourage business investment and expand job opportunities across America, and it looks to be working. Moreover, all businesses can immediately write off the costs of new equipment for five years. This provision, called “expensing,” lets businesses invest more in America and boosts the pro-growth benefits of the new lower tax rates.

Tax reform is ultimately a long-run gain for the American economy, so any definitive statements about its failure or success based on preliminary assessments are likely overwrought. Economic indicators can fluctuate from month to month, as we are currently seeing in the stock market.

The long-run trend will ultimately tell the economic story. What we can say at this point is that tax reform helped America regain a competitive advantage for business investment, and businesses are indeed investing.

Tax reform, however, is not the only game in town. Congress should not lose sight of the long-run economic opportunities afforded by tax reform that could be squandered by other economic policy mistakes.

International trade, for example, is crucial for business investment and economic growth. New Chinese tariffs on American exports, and higher U.S. tariffs, could have wide-reaching negative impacts on the U.S. economy.

For tax reform to succeed, we also need to constrain federal spending to reduce pressures to raise taxes in the future. To solidify the potential benefits of tax reform, the existing tax cuts must be made permanent, which will be hard if Washington runs trillion-dollar deficits every year - a very likely scenario next year.

New lower tax rates for businesses and individuals have made America competitive again. Congress and the president should work to bolster tax reform’s success and must be wary of policies that might undermine the gains Americans are already experiencing.

This piece originally appeared in Newsday

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