Tax reform's broken promises on full display in latest GDP report

Tax reform's broken promises on full display in latest GDP report
© Greg Nash

Despite the promises of massive increases in business investment if we cut corporate tax rates, the American people instead are seeing a slowing in business investment growth while deficits increase and companies handout stock buybacks and dividends like Halloween candy.

Those who made the promise keep saying “promises made, promises kept” — promises made to whom? Look to the massive increase in stock buybacks and dividends for the answer.

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According to the most recent estimate of third-quarter gross domestic product (GDP) from the Bureau of Economic Analysis, nonresidential business investment grew at a 0.8-percent pace, its slowest rate since 2016.

How disappointing has business investment been? During the three quarters following passage of the corporate tax cuts, nonresidential business investment grew a cumulative 5.1 percent. During the same three quarters the year prior — before passage of the tax bill — it grew at 5.0 percent.

Over nine months, the increase in business investment was a whopping one-tenth of 1 percent. So much for the corporate tax cuts being the sure-fire way to generate a tsunami of business investment as we were promised. Instead, there has been a tsunami of debt, stock buybacks and dividends.

The fiscal deficit reached $779 billion in fiscal year 2018. This is a 17-percent increase over 2017. Not coincidentally, corporate tax revenue plunged 31 percent in 2018, and it's not going to get better anytime soon. The Congressional Budget Office estimates that 2019’s deficit will reach nearly $1 trillion dollars.  

Deficits aren’t the only thing increasing. Apple announced $100 billion in stock buybacks on top of its $23.5 billion in first-quarter 2018 stock buybacks.

Harley Davidson announced $700 million in share buybacks shortly after it said it would close its Kansas City plant. Wells Fargo, which is expected to lay off 26,5000 workers, is planning to give $32.8 billion in stock buybacks and dividends.

Meanwhile, Verizon has pledged $10 billion in dividend payouts while announcing 44,000 employee cuts. And despite having enough money for $10 billion of stock buybacks, apparently Pfizer apparently doesn’t have enough money to continue their Alzheimer’s and Parkinson’s research, so they are firing scientists.

None of this should be a surprise. Before the tax bill was passed, 46 percent of companies surveyed by Bank of America Merrill Lynch said they would increase share buybacks. This compares to only 35 percent saying they would use the extra cash on capital expenditures.

There is talk of "Tax Reform 2.0," and it is desperately needed because the original tax reform has a lot of bugs that need to be fixed.

First, there is no connection to tax cuts and business investment. Companies can stop investing tomorrow and their tax rate will remain at the new 21-percent rate, just like companies that increased investment. That doesn’t make any sense. Instead, base company tax rates on what was promised: business investment, wage growth and job growth.

First, base each company’s tax rate on its rate of business investment. Companies increasing investment would get a tax cut while those that didn’t wouldn’t. This would allow companies increasing investment to receive an even greater tax break because the tax cuts currently going to companies not increasing or cutting investment would instead go to companies increasing investment.

Next, base each company’s tax rate on its rate of wage growth. Companies increasing wages would get a tax cut while those that didn’t wouldn’t. This would allow companies increasing wages to receive an even greater tax break because the tax cuts currently going to companies not increasing wages would instead go to companies increasing wages.

Last, base each company’s tax rate on its rate of American job growth. Companies increasing hiring in America would get a tax cut while those that didn’t wouldn’t. This would allow companies increasing hiring in the U.S. to receive an even greater tax break because the tax cuts currently going to companies not increasing U.S. hiring would instead go to companies increasing wages.

Chris Macke is the founder of Solutionomics, a think tank focused on developing solutions for a more efficient, merit-based corporate tax code. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he's a contributor to the Fed Beige Book. Find him on Twitter: @solutionomics.