Looking Back on the Tax Cuts and Jobs Act's First Year

One year ago, President Trump signed the Tax Cuts and Jobs Act (TJCA) into law. That reform introduced a host of changes into federal tax law, including:

• a substantially decreased corporate tax rate (from 35 percent to 21 percent)
• a simplified set of income tax brackets with lower tax rates for individuals
• a near-doubling of the standard deduction
• elimination of the personal exemption and many itemized deductions, and
• an expanded child tax credit (from $1,000 to $2,000, and making $1,400 of the credit refundable)

The TJCA has certainly lowered the taxes that businesses and individuals pay, but how do we know whether the tax cuts have been effective at promoting economic growth? And what tax-related news should we be watching for the next year? Here are a few points for reflection on the one-year anniversary of tax reform:

• Judging the exact effects of the law on economic growth is difficult. There’s no way to perfectly evaluate the effect of the TJCA. Because there’s no control group, as in a scientific experiment, we can’t easily know what has happened in the past year specifically because of the TCJA’s passage and what would have happened without it. Furthermore, the effects of the law are more likely to shift the long-term rate of growth rather than provide an immediate stimulus. That’s a good thing, but it also makes its effect more difficult to measure than a one-time bump in jobs creation or GDP.

• That said, the economic news is good. There’s certainly a lot of reasons for the proponents of the TCJA to be happy with the direction that the economy has taken in the past year. GDP growth is up, unemployment is at a 49-year low, and wage growth has increased slightly. To the, albeit limited, extent that we can attribute those changes to tax reform, it seems to be doing quite well.

• Taxpayers are keeping more of their money. According to research from the Heritage Foundation, the average household kept $1,400 more of their paychecks in 2018 (and married couples with two children saved $2,917). For those who are interested, the Tax Foundation has created a calculator that individuals can estimate their own reduced tax burden.
• Tax filing has become simpler, meaning that compliance costs have decreased. Doubling the standard deduction and reducing itemized deductions will encourage almost 30 million additional people to use the standard deduction, resulting in a time savings of 90 million to 157.5 million hours. In addition, the revised alternative minimum tax will affect over 90 percent less tax filers than it did previously, reducing the amount of time spent filing taxes by another 135 million hours. The Tax Foundation estimates the dollar value of the reduced compliance costs to be $7.7-$10 billion.

• Keep watching overseas earnings. Back in March, I suggested that the repatriation of offshore cash by businesses was a good short-run indicator of tax reform’s success. In the first three quarters of 2018, companies brought $571 billion in overseas profits into the U.S. That’s lower than the $4 trillion that President Trump predicted (Wells Fargo estimated that U.S. businesses held around $1 trillion in overseas liquid cash assets in 2017 while the Wall Street Journal reported that total profits parked overseas amounted to $2.7 trillion), but it is still far above the historical norm. As a report from the Tax Foundation noted, the amount repatriated in the first half of 2018 was more than the entire amount repatriated in 2015, 2016 and 2017 combined.

• Stock buybacks can boost economic growth. Many pundits have implied that this year’s corporate stock buybacks are solely motivated by the tax reform, but companies bought back an average of $531 billion in stock each year before the TCJA was passed.  Compared to this, in the first three-quarters of 2018 U.S. companies in the S&P 500 spent $583 billion buying back their own stock back from investors. On a per-quarter basis that’s a 46 percent increase compared to the previous five years—a substantial increase, but certainly not the same as all stock buybacks being attributable to the TCJA. The same pundits often claim that stock buybacks only benefit rich stockholders, but a better economic understanding of the situation is that stock buybacks shift money from corporations who weren't able to use it effectively to entrepreneurial investors who think that they see a better investment opportunity elsewhere. This new investment enables another company to develop new products or better serve customers. Ensuring that the best prospects for growth receive access to the necessary resources to fund that growth is exactly what the stock market is supposed to do. By assisting with this critical function of the stock market, the TCJA is likely to increase long-run economic growth.

• There’s still room to streamline. The TCJA left some promising tax reforms on the table, including a proposal that would have ended the federal tax credit for local stadium subsidies. Policymakers would also do well to consider creating large, flexible universal savings accounts to give every person the same access to retirement and healthcare saving tools. And Congress could help solve the “skills gap” that companies face by allowing them to deduct the expense of training workers for new positions. Reform-minded policymakers should also consider further reducing state and local tax deductions or shrinking the mortgage interest deduction to eliminate perverse economic incentives. Lastly, legislators could also make the TCJA’s tax cuts permanent to reduce the future fiscal uncertainty that taxpayers currently face.  

• Further tax cuts require fiscal discipline. Unfortunately, recent tax cuts have not been followed by a reduction in federal spending. Quite the opposite: spending on both discretionary and nondiscretionary items has continued climbing in the past year. Troublingly, this is the first time that the US budget deficit has increased during a time of peace and economic growth. Tax reformers should remember that unless they rein in spending, tax cuts will merely shift the burden of current government spending to future taxpayers. And increases in government borrowing can decrease current and long-run economic growth by siphoning away the cash needed for investments in the private market.