Did the U.S. tax overhaul do what it promised?

The law on tax cuts and jobs is now two years old. So what did it do?

The tax cuts themselves are easy to spot: tax burdens have decreased for most families and businesses. Domestic retailers and banks made some of the biggest savings.

How the law permeated the economy is more murky. Employment, wages and other key indicators have improved, and the economy looks stronger for 2020 than forecast at the start of the Trump presidency.

However, many of these metrics were already on the rise before President Trump's tax bill was signed, and most economic figures don't show a sharp change in line with the tax bill. The early growth in business investment appears to have subsided. Overall economic growth rose before retreating again. Cross-border investment patterns have changed only slightly.

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Bottom line: It seems clear that the tax cuts contributed to economic growth – but not enough to be self-financing, as many donors have promised. And even some of the intended beneficiaries say the gains were not dramatic.

"On the whole, it's been positive that it has helped the broader consumer, but the effective tax rate for us has been much lower than you'd think," said Marc Bitzer, CEO of Whirlpool Corp., in an interview last month. He said the global device maker hadn't seen any significant change in its taxes or boosted its US attitudes or capital investments because of the law.

For multinational corporations, the law lowered the U.S. federal tax rate from 35% to 21%, limited some tax breaks, made it easier for shareholders to make overseas profits, and tried to make it harder for companies to benefit from very low overseas tax rates. How individual companies fared depended, among other things, on their mix of foreign and domestic income.

It is not easy to isolate the effects of tax law – the extent to which it led to investment during a period of general boom in the US economy. And it wasn't the only major change in economic policy in recent years. One of the biggest disruptive factors has been the trade war that President Trump has waged for much of his administration.

The authors of the tax law hoped to create security for businesses and create a stable platform for investment. However, the climate surrounding the creation of the tax bill, which was drafted and passed by Republican lawmakers without democratic support, has left its long-term future vulnerable to political change from the start: executives fear that important parts of the tax bill might be amended or changed be overturned if the Democrats regain control of the White House or Congress. Leading Democratic presidential candidates have all proposed new $ trillion tax increases, including reversing the 2017 law's tax cuts for businesses and high-income individuals.

The trade war has messed up certainty, made businesses uncertain about their costs and reluctant to invest in the long term.

"We're more competitive in the US than we've been on the tax front for many, many years," he said

Torsten Sløk,

Chief Economist for Deutsche Bank Securities. So far, the downside effects of trade tensions have overshadowed the benefits of tax cuts on corporate investment.

While Democrats say the tax bill didn't deliver what it promised, Republicans say that is a big reason the US economy is as strong as it is today.

The data shows the following:

Individuals pay less of their income in taxes.

For households, the law lowered tax rates, increased tax credits for families with children, narrowed the alternative minimum tax significantly, and expanded the standard withholding – the minimum amount someone can earn before income taxes come into effect. Other changes partially offset these savings, such as the removal of personal exemptions. The result for almost any income group: lower taxes or larger net refunds. Negative tax rates here reflect tax refunds that exceed taxes.

The law has also reshaped what factors determine each person's tax burden. A larger standard deduction means fewer people list their deductions, so fewer households are incentivized to make charitable contributions and mortgage interest payments. The Internal Revenue Service also changed how much it withheld from paychecks. This didn't affect what people ultimately owed, but it did mean that reimbursements tended to shrink slightly compared to previous years.

The change lowered the tax revenue projections.

In mid-2017, before the tax bill was drafted, the Congressional Budget Office forecast that tax revenues for individuals and businesses would continue to grow with the economy. By lowering tax rates for both groups, the law generally reduced the revenue projections from what they would have without the tax overhaul.

And more income comes from individuals.

The result: total tax revenue as a share of the economy has decreased. Within this smaller source of income, more of it comes from individuals than from companies.

Lower tax rates have boosted companies' after-tax profits …

Overall, the change in US tax law has contributed to the global effective tax rates for S&P 500 companies falling from nearly 26% to just under 19%. Tax rates rose for energy and materials companies, and rates fell slightly for companies using consumer staples.

… But their spending did not continue to pick up

Higher profits make companies spend more money or return it to shareholders. Proponents argued that companies would invest more in factories, real estate, vehicles, and computers or other devices. These investments would, in turn, boost production and the economic activity of suppliers – a positive cycle.

Business investment grew faster at first, but not dramatically. In the fourth quarter of 2018, broad levels of corporate investment rose 5.9% year over year – the growth rate the CBO had predicted when analyzing tax legislation.

However, growth soon returned to pre-overhaul levels and has since stalled and even declined from the first through the third quarters of this year.

"Anecdotes don't show companies are spending much more on investments than they have in the past," he said

Joe LaVorgna,

Chief Economist for America at Natixis.

Administrative officials argue that this is not surprising. They say the one-time increase in capital expenditures should pay off in years to come as companies take advantage of new equipment and facilities.

Employment and wages rose.

If companies have been reluctant to invest in capital, there is no question that the labor market has improved, especially for those in the prime working age, due at least in part to higher consumer spending.

The same was true for wages and household incomes, although minimum wage increases can also affect pay.

However, a common feature of the 2017 Tax Act has failed: the rewards that many companies have announced for employees – often described as part of the benefits of corporate tax cuts with employees – have not been replicated even if corporate tax savings have continued.

House prices rose more slowly in some areas.

Some individual provisions of the tax audit also seem to have left their mark. For example, the $ 10,000 cap on state and local tax deductions was felt in some real estate markets. In areas where the trigger is used more often, property prices have risen more slowly, according to real estate company Zillow.

US companies brought cash back from overseas.

Another provision was designed to encourage US companies to bring foreign profits to the US by ending a tax liability previously triggered by such measures. In some ways, it worked: U.S. companies shifted more than $ 1 trillion from overseas subsidiaries to their U.S. parents. But the sums are far lower than President Trump predicted, and multinational corporations already had a lot of capital even without those foreign profits.

Overall, companies are again accumulating profits overseas.

Most of what companies picked up – $ 500 billion out of roughly $ 775 billion in 2018 – came from three low-tax countries: Bermuda, the Netherlands, and Ireland;

Brad Setser,

A senior member of the Council on Foreign Relations observed. This underscores the extent to which large corporations – especially those dependent on patents and other intellectual property rights like large pharmaceutical and technology companies – have shifted past profits to these countries, Setser says.

Since 2018, the overall profits generated by foreign subsidiaries have lagged behind the new profits generated by these subsidiaries abroad. In other words, the stock of foreign profits is growing again and not shrinking, albeit more slowly than before. This begs the question of how successful the law is in getting US companies to relocate more of their operations to the US.

Much of what they picked up went into buybacks.

What happened to the trillion dollars of foreign affiliate profits passed on to U.S. parents? Much of that went into share buybacks, which rose to record levels after the tax bill was passed, though that money may then be reinvested in other companies. "It looks like the corporate tax cut was mainly due to buybacks," said Sløk of Deutsche Bank Securities.

Much of the buybacks came from a small number of giant companies: around half of the buybacks in recent periods have come from 20 companies, data from S&P Dow Jones Indices shows, and

Apple Inc.

In the second and third quarters of 2019 alone, the buybacks accounted for $ 18 billion.

A lower domestic tax rate was part of an effort to encourage both U.S. and overseas companies to invest in the U.S. rather than overseas. This was also true of a reduced tax rate on some US exports and a complex new global minimum tax rate designed to make low-tax countries less attractive.

So far, however, foreign investment in the US has increased only marginally and temporarily. The pace of new US foreign investment briefly picked up before it calmed down. (A sharp decline in U.S. investment overseas in early 2018 reflected the transfer of previous profits from overseas subsidiaries to U.S. parents.)

The cuts came at a cost.

There is of course a price to be paid to lowering taxes. Without a similar spending cut or robust economic growth, the federal deficit will rise.

Proponents of the tax law said it would pay for itself in the long run; So far, it has not generated the growth that would make it possible.

Write to Richard Rubin at [email protected] and Theo Francis at [email protected]

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