David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week, we're calibrating expectations. As Americans start to see changes in their paychecks due to the Tax Cuts and Jobs Act, how do we assess whether the $1.5 trillion cut was worth it? Tax Notes Today reporter Jonathan Curry has been looking into some of the administration's claims about the law, and how success can actually be measured. Jonathan, welcome back.
Jonathan Curry: Hi, Dave. Good to be here.
David Stewart: So what is the administration saying about the tax cuts?
Jonathan Curry: The White House has been busy making the same claim over and over again this year. And that's that the tax cuts are already working, the economy is doing great, and you have us to thank for it.
David Stewart: What's their proof?
Jonathan Curry: Well, lately, there's nothing the White House loves more than pointing to the employee bonuses that companies have dished out since they passed the tax cuts. The White House has taken to calling them the “Trump tax bonuses” or “tax cut bonuses,” and they've been issuing regular updates. By their latest count, companies have announced a collective $150 billion in planned investments and $4.2 billion in bonuses paid out to workers. President Trump has also spoken at a bunch of rallies the past couple weeks to get people fired up about the bonuses and jobs and tax cuts. And if you stayed up late for it, you probably heard him devote a big chunk of his State of the Union speech to the topic. And of course, he still does tweet about it pretty often.
David Stewart: Well, everybody loves a bonus. What else are they saying?
Jonathan Curry: The stock market comes up pretty often. President Trump will sometimes tweet about the latest record-breaking stock market numbers. Or he'll ask people during his speeches about how their 401(k)s are doing, and that always makes for a pretty good applause line.
GDP is another one that comes up. Over and over again, the White House has said it wants to have 3 percent GDP growth, sometimes even more like 4 percent. In the years since the 2008 recession, GDP growth in the U.S. has hovered just around 1.5 to 2 percent. The Trump Administration has, for many months, insisted that their economic agenda will get the U.S. back up to at least 3 percent growth. Now, economists have generally been skeptical that we can achieve a sustained 3 percent GDP growth rate for a variety of factors — mostly related to demographics, like an aging baby boomer population. But after two quarters last year in which GDP grew at a rate above 3 percent, the administration has been really excited.
David Stewart: What are we, as skeptical journalist types, to make of these claims?
Jonathan Curry: I think it's time for a little bit of a reality check. I think the White House probably does get to take at least some credit for the bonuses. I mean, a lot of these were explicitly tied to the passage of the tax bill, but even so, a bonus is just a one-time thing. And I don't want to say they're just crumbs, but if this is what you're getting from a $1.5 trillion deficit-increasing tax cut, you have to wonder a little bit if it was worth it. And also, the amount of bonuses the White House says have been paid out because of the tax cuts pales in comparison to the amount of so-called corporate bonuses, which would be things like stock buybacks and dividends paid out to shareholders, which have come out to the amount of around $100 billion more than last year at this time.
David Stewart: So we're talking about $100 billion paid out to shareholders versus $4 billion paid out to workers.
Jonathan Curry: Right. Now, those can still indirectly benefit workers, so it's not exactly a fair comparison. But in one sense, if we're comparing direct tax cut winnings, corporations did get a pretty big share of the pie.
And another reason why we may have heard about a surge of year-end bonuses in December is that they would be deductible at the 35 percent corporate rate, which gives companies a much more valuable tax write-off than if they were offered bonuses in 2018 because those would be deductible at the new 21 percent rate. Now, all that to say, while bonuses are great and they seem to be tied to the tax cuts to at least some extent, they're not what you should be looking at for evidence that the tax cuts are really working as intended. It's such a small response in the context of the overall tax law.
David Stewart: What about the reaction from Wall Street? It would seem that that message has gotten a bit more complicated recently.
Jonathan Curry: Right. I mean, the way I see it, you live or you die by the stock market. And since virtually day one of the Trump administration, the White House has been taking credit for the stock market's rise. So not surprisingly, it then downplayed the stock market's plunge earlier this month, and to be fair, that's not unusual. Historically, it's sort of been the White House's prerogative in any given administration to take credit for the good and downplay the bad. But it's just not a good measure of the strength of the overall economy, or the tax cuts doing their thing. Maybe they should just get some brownie points for something like business optimism.
There are other economic indicators the White House likes to point to as well, though, like the GDP growth rate or higher wages. But I've spoken to a couple economists who aren't thrilled with these metrics either.
David Stewart: How so?
Jonathan Curry: Well, on GDP in 2017, we had two quarters of just over 3 percent growth, which was good, but not necessarily that unusual. During the Obama years, we had quarterly growth spikes here and there as well. For example, in the third quarter of 2014, the economy grew a whopping 5.2 percent, but that was just for one quarter. And averaged over the course of the year, GDP growth was less than half of that, at 2.4 percent. And that's about where we ended up in 2017: 2.6 percent for the year.
David Stewart: So if GDP goes up in 2018, that doesn't mean anything?
Jonathan Curry: Well, not necessarily, although there are a lot of things that affect the overall size of the economy. If the economy grows and there are no other major factors acting on it, like a sudden big decline in oil prices or something like that, then that would likely be evidence, at the very least, of a short-term Keynesian-style boost. A better indicator would be if we have long-term sustained economic growth above 3 percent. And the White House folks, to their credit, do frequently talk about long-term growth being their goal. But even if that happens, it's still a bit of a leap to say that tax cuts caused the growth. Because there's a lot of different economic factors at play when you have a $20 trillion economy.
And the longer the amount of time between when the tax cuts are enacted and when you're evaluating them, you then also create the possibility that other potential factors creep into the equation. So even over a longer period of time, you're still going to have a hard time pinpointing the tax cuts as the cause of the growth. The fundamental issue here is that it's really hard to say for sure how the economy would be working if the tax cuts hadn't have happened.
David Stewart: Makes sense. So what about wages? We often hear that wages have been stagnant for a very long time. If those suddenly start to tick upwards, would that be something we could credit the tax cuts for?
Jonathan Curry: Now this is an interesting one. Kevin Hassett is the White House's top economist, and he has said that we're approaching the point in an economic recovery where wages should start to pick up anyways. But he also says that the tax cuts will essentially supercharge that effect, and that's a pretty bold prediction. It'll be interesting to see if it works. His argument is that since we're in the later years of a recovery period — we're now 10 years after the great recession — with unemployment being so low, there aren't enough workers to fill jobs, so businesses basically have to start competing for skilled labor and pay their workers more, or they need to invest more in productive capital to make their workers more productive. It's something he calls capital deepening, and that's supposed to have the effect of driving up wages. Now, most economists I've talked to seem to agree with Kevin Hassett on at least that first point. That we're at a turning point in the economic recovery where wages should start going up with or without the tax cuts.
And in fact, wage growth already was higher in 2017 than in previous years. So it's very possible, likely even, that we'll continue to see wage growth that probably would've happened even without the tax cuts. What remains to be seen is whether we'll see that supercharged effect Kevin Hassett predicted.
David Stewart: So the bottom line is we can't possibly separate out the effects of the tax cuts from the existing economic factors. Is there anything worth looking at?
Jonathan Curry: Have some hope, Dave! The economists I talked to all basically agree there's one particular indicator they're looking at that they think is a pretty good measurement of the tax cuts working in the way the White House hopes.
David Stewart: I'm on the edge of my seat. What is it?
Jonathan Curry: Capital investment.
David Stewart: I think you oversold it, but go on.
Jonathan Curry: Well, this is something that Kevin Hassett has talked about. And he even threw down a gauntlet of sorts, saying it would be completely fair to say the tax cuts aren't working if, after a year, capital investment remains unchanged or goes down. Private investment as a share of GDP has consistently been pretty low for years now by historic standards, somewhere around 16 percent. So if that number suddenly goes up to 19 percent or 20 percent of GDP, then the White House should probably start to get some bragging rights. And more investment also correlates with higher wages. So if capital spending goes up as a share of GDP, then that's a win for American workers too.
David Stewart: Alright, what's the caveat on this one?
Jonathan Curry: I've got caveats, alright. The first, I'm told, is that you'd want to observe the capital investment numbers over a long period of time, not just a few months. And right now, the administration has been highlighting a couple of big corporate announcements of new capital investments by companies like Apple, which announced that it plans to invest $350 billion over five years here in the States. And that's a lot, but it's just one company. But another thing to keep in mind is that business planning often takes time and doesn't happen overnight. So when Apple announces $350 billion shortly after the tax law is enacted, you get back to that fundamental question: Would this have happened if the tax bill hadn't have passed? And in Apple's case, it was already on pace to spend around $275 billion over those five years. So did the tax cuts help there? Maybe, and maybe even probably. But it's really hard to establish that cause and effect connection.
David Stewart: If these measures are all so useless for actually determining whether the tax cuts are effective, why are we using them?
Jonathan Curry: Politically, the Republicans don't really have any choice. They're up against a really, really challenging political reality, which is that midterms are rough. Over the last 80 years, the president's party has always lost seats in the midterm elections, with just two exceptions. Once was after the 9/11 attacks when President Bush was still riding a surge of support. And the other time was in 1998 when the economy was booming under President Clinton. So in talking to a few political experts, the only real hope Republicans have if they want to keep their majorities in Congress is to have a booming economy. And they need to beat that message into the public's collective consciousness over and over again, and that's what they're doing. Conservative groups like Americans for Prosperity and Freedom Partners are spending millions of dollars on ad campaigns dedicated to this message. And it's being widely shared by Republican lawmakers up for reelection. The tax cuts give them a noteworthy legislative accomplishment, and a way to try to take credit for the economy. But that also still assumes that the economy is still performing well in November.
David Stewart: It sounds like this is going be something that we'll need to come back to after it's had a chance to play out. Jonathan, where can listeners find you online?
Jonathan Curry: You can follow me on Twitter, @jtcurry005.
David Stewart: Thank you for being here. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org.
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