It’s not trickling down: New data provides no evidence that the TCJA is working as its proponents claimed it would
The strongest economically-respectable argument from proponents of the Trump administration’s Tax Cuts and Jobs Act (TCJA) was that corporate tax cuts would eventually trickle down to workers’ wages. The theory goes that higher after-tax corporate profits are passed down to shareholders in the form of higher dividends. Higher dividends incentivize households to save more, or attract more savings from abroad. The increased savings push down interest rates, so that it’s easier for corporations to borrow money to invest in new plants and equipment. And this new capital stock gives workers more and better tools to work with, boosting their productivity, and eventually that increased productivity should boost wages.
We’ve explained plenty of times why, in practice, this theory was unlikely to hold (and that even this theory depends on the tax cut not being debt-financed to work—but the TCJA was indeed financed solely with debt). But the bottom-line linchpin for assessing if the TCJA is working as promised is the performance of investment. We now have 18 months of data on investment since the passage of the TCJA, plenty of time for its increased incentives for private investment to have taken hold. But the data doesn’t come close to supporting the story told by TCJA proponents.
No evidence the TCJA is working as advertised: Year-over-year change in real, nonresidential fixed investment, 2003Q1–2019Q2
|Quarter||Real, nonresidential fixed investment|
Source: EPI analysis of data from table 1.1.6 from the National Income and Product Accounts (NIPA) from the Bureau of Economic Analysis (BEA).
The TCJA was supposed to boost investment. Instead after a few quarters of upward growth consistent with the pre-TCJA trend, the year-over-year change in nonresidential fixed investment seems to be falling off a cliff. Year-over-year growth in real, nonresidential fixed investment was 2.7 percent in 2019Q2—a far cry from not just the 6.9 percent growth in 2018Q3, but also the pre-TCJA growth of 5.4% in 2017Q4.
Previously it appeared that investment growth had simply stalled, instead of the boom the TCJA was supposed to create, but revisions paint a worse picture. Meanwhile, real, residential fixed investment hasn’t posted a quarter of positive growth since the passage of the TCJA.
And to be clear, this was a story about the long-run. If the TCJA were to be working as advertised, we’d expect to see a significant permanent step-up in investment. As we’ve said, the failure of the TCJA shouldn’t come as a surprise. A clear-eyed look at the available evidence always suggested workers would not likely benefit significantly from a corporate rate cut.