January 26, 2018
The centerpiece of the Republican tax cut was a big reduction in the corporate tax rate, lowering it from 35 percent to 21 percent. While critics argued this was just a handout to shareholders, who are overwhelmingly wealthy, the counter was the tax cut would lead to a surge in growth, which would benefit everyone.
The logic is that a lower tax rate provides more incentive to invest. With new investment in plant, equipment, and intellectual products, productivity will rise. Higher productivity will mean higher wages, which is good news for the bulk of the population that works for a living.
We got the first test of the jump in investment story today when the Commerce Department released data on capital goods orders for December. It is not good for the Republican position. New orders actually fell for the month, dropping by a modest 0.1 percent from the November level. Excluding aircraft orders, which are highly volatile, orders fell 0.3 percent.
These are not huge declines and this series is always erratic, so no one should make a big deal about the reported fall in December. But it certainly is hard to make the case here for some huge tax-induced jump.
If folks think it’s too early to make any assessment, let’s take the Republican argument at face value. They claim that the tax rate makes a huge difference in the investment decisions of firms. While the bill was just signed into law at the end of last month, it was pretty much a sure deal by the 20th. Furthermore, the basic outline was on the table at the start of September.
If the tax rate is really a big deal for investment decisions, then corporate America should have been putting together its list of likely projects as soon as a big tax cut became a clear possibility back in September. By December, forward-looking firms should have been ready to jump as soon as they knew the tax cut would be a reality.
This means that we should have seen at least some of these orders being registered before the end of the year. The fact that there is zero evidence of any uptick suggests that investment decisions are not as sensitive to tax rates as claimed.
It is, of course, early — maybe the January data will tell a different story. But so far, it doesn’t look the Republicans have much of a case. The tax cuts definitely made the rich richer, at this point we don’t have much evidence they will help anyone else.
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