If you don't see the benefits of tax reform, you're in denial or blind

If you don't see the benefits of tax reform, you're in denial or blind
© Getty Images

In the days before Christmas last year, Congress passed and President TrumpDonald John TrumpGrassley: Dems 'withheld information' on new Kavanaugh allegation Health advocates decry funding transfer over migrant children Groups plan mass walkout in support of Kavanaugh accuser MORE signed the “Tax Cuts and Jobs Act” into law, marking the first significant tax reform effort in 31 years. Contrary to what a wide array of critics assert, this policy gift has been a real victory for small businesses and the economy at large. 

For example, reducing the corporate income tax rate from 35 percent to 21 percent boosted incentives and resources available for business investment, including small businesses, since 86 percent of C-Corps have fewer than 20 workers.

ADVERTISEMENT

The same is the case for cutting the effective top tax rate on most LLCs and S-Corps from 39.6 percent to 29.6 percent. For good measure, the ability to expense certain investments (i.e., write off in the year made), such as in machinery and equipment, was expanded. 

 

In fact, especially when combined with assorted deregulation efforts, incentives for investing clearly have been enhanced, and the effects can be seen in some key numbers.

From the first quarter of 2017 to the first quarter of 2018, according to U.S. Bureau of Economic Analysis data, growth in real nonresidential — or business — investment took a significant step up from what the U.S. economy had been experiencing over the previous four years, and really since the onset of the Great Recession.

In fact, the growth in business investment over the past five quarters has run ahead of the post-World War II average and the average since the end of this past recession. 

Consider that growth in real nonresidential investment averaged a robust 6.9 percent from the first quarter of 2017 through the first quarter of this year (our latest data). That runs well ahead of the 4.6 percent post-war average and the 4.4 percent averaged since the Great Recession ended. It’s more than double the 3 percent average growth rate that prevailed from 2013 to 2016.

Looking at each major area within business investment, the step up in growth remains unmistakable. Structures investment saw an average real growth rate of 7.1 percent over the past five quarters versus a mere 2.6 percent over 2013 to 2016.

Meanwhile, real growth in equipment investment came in at 8.2 percent since the first quarter of 2017 compared to only 2.8 percent over the previous four years. And the real rate of growth in intellectual property investment moved from 3.9 percent from 2013 to 2016 to 5.3 percent over the last five quarters. 

Increased investment is good news now and for the future. Current GDP growth is boosted, and future economic growth will benefit from the innovations, efficiencies, business expansion and enhanced labor productivity that investment drives. For good measure, in turn, worker earnings benefit from improved productivity.

Critics are merely playing politics when denying what has occurred recently, while others seem bewildered. But there’s no reason for bewilderment. The tax and regulatory policy climate changed dramatically after the November 2016 elections.

The Obama era of pushing for and imposing increased tax and regulatory burdens stopped and was replaced by a series of deregulatory actions and the pre-Christmas 2017 business tax relief and reform.

Of course, more work is needed to secure strong growth:

  • rolling back and replacing the many costly ills of ObamaCare that still exist;
  • making permanent and expanding various provisions in the 2017 tax measure;
  • implementing more substantive tax relief for individuals;
  • lowering the capital gains tax rate to further incentivize investment and entrepreneurship; and
  • most notably, stepping back from protectionist measures on trade and having the U.S. reclaim global leadership in advancing free trade.

But no matter what critics say, the economics and numbers are clear. There’s no denying the benefits accruing thanks to deregulation and that nice gift of business tax relief made law just before this past Christmas.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council.