Q: How is the Tax Cuts and Jobs Act of 2017 affecting the economy?
A: When the tax cut was passed, President Donald Trump predicted that it would act as “rocket fuel” for the economy. We now have had a year to see whether this prediction was correct. In looking at the data, we see a complicated story.
The good news is that economic growth, as measured by gross domestic product, did increase this past year. In the second and third quarters, growth increased to 4.2 percent and 3.4 percent, respectively. This growth is estimated to have slowed in the fourth quarter to 2.7 percent, impacted by uncertainty due to threats about tariffs and government shutdowns.
The bad news is that it does not look like the tax cut has had much of an impact on investment and jobs. The National Association of Business Economists’ survey released recently notes, “A large majority of respondents — 84 percent — indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”
How can the whole economy be growing without much increases in investments or jobs? To figure that out, we can look at the data closer. One piece of data that stands out from this past year is the record amount of “stock buybacks.”
With a stock buyback, companies with excess cash reserves decide that rather than using that cash to increase capital expenditures or increase wages, they use that excess cash to buy back stock from the general market. These purchases in effect reduce the number of outstanding shares of a company, and thereby raise the price of that company’s stock. In 2018, we had a record amount of stock buybacks: $1.1 trillion.
So what do we take from this all? This data provides further evidence that tax cuts are not very effective ways to achieve long-term growth by increasing investment and jobs. Instead, they act to temporarily boost the economy, acting as what economists call a Keynesian instrument. Keynesian instruments are useful tools when the economy is suffering such as in 2008 and the following years, but in years like 2018, tax cuts act more like what another expert calls a “sugar high.”
Dale B. Thompson is on faculty in the ethics and business law department at the University of St. Thomas Opus College of Business.