Heading into the midterms, there’s still no evidence that the TCJA is working as promised

It’s been widely reported that going into this year’s elections, Republicans aren’t running on their signature tax law from last year—the Tax Cuts and Jobs Act (TCJA). It’s not difficult to see why. The TCJA is increasingly unpopular, and a recent GOP internal poll shows that respondents say the law benefits “large corporations and rich Americans” over “middle class families.”

Republicans shouldn’t find this so surprising—since the law they wrote was a massive giveaway to the rich and big corporations. And voters do not appear fooled by a PR campaign earlier this year where corporate allies tried to trick workers into believing that any bonus they received in 2017 was due to the TCJA.

The claims of immediate benefits to workers by those corporate allies should never have been taken so seriously by the media. The theory justifying claims that corporate rate cuts should trickle down to typical workers always required that a long chain of economic events to occur first. We’ve long pointed out that nearly every single link in this chain is likely to break down. The first link in this chain concerns firms’ investment; anyone trying to discern if the corporate rate cuts are having their promised effects for workers should be watching investment like a hawk.

The story here doesn’t look any better for proponents of the TCJA than it did in September. The quarterly growth rate in business investment cratered in the third quarter of the year, growing at a 0.8 percent annualized rate. The administration’s favorite data point, the year-over-year increase in real, private nonresidential fixed investment, slowed from 7.1 percent in the 2nd quarter of 2018 to 6.4 percent in the 3rd quarter. Charted below, the data still doesn’t show the clear boost to the trend of investment that would indicate a positive effect coming from the TCJA.

Figure A

No evidence that the TCJA has increased investment: Year-over-year change in real, nonresidential fixed investment, 2003Q1-2018Q3

date NRFI
2003Q1 -2.3%
2003Q2 1.6%
2003Q3 4.0%
2003Q4 6.8%
2004Q1 5.2%
2004Q2 4.9%
2004Q3 5.7%
2004Q4 6.5%
2005Q1 9.2%
2005Q2 8.2%
2005Q3 7.4%
2005Q4 6.1%
2006Q1 8.0%
2006Q2 8.2%
2006Q3 7.8%
2006Q4 8.1%
2007Q1 6.5%
2007Q2 7.0%
2007Q3 6.8%
2007Q4 7.3%
2008Q1 5.8%
2008Q2 3.8%
2008Q3 0.2%
2008Q4 -7.0%
2009Q1 -14.4%
2009Q2 -17.1%
2009Q3 -16.1%
2009Q4 -10.3%
2010Q1 -2.3%
2010Q2 4.1%
2010Q3 7.5%
2010Q4 8.9%
2011Q1 8.0%
2011Q2 7.3%
2011Q3 9.3%
2011Q4 10.0%
2012Q1 12.9%
2012Q2 12.6%
2012Q3 7.2%
2012Q4 5.6%
2013Q1 4.3%
2013Q2 2.3%
2013Q3 4.4%
2013Q4 5.4%
2014Q1 5.4%
2014Q2 7.6%
2014Q3 8.0%
2014Q4 6.4%
2015Q1 4.5%
2015Q2 2.7%
2015Q3 0.8%
2015Q4 -0.7%
2016Q1 -0.5%
2016Q2 -0.1%
2016Q3 0.8%
2016Q4 1.8%
2017Q1 4.4%
2017Q2 5.3%
2017Q3 5.0%
2017Q4 6.3%
2018Q1 6.7%
2018Q2 7.1%
2018Q3 6.4%

 

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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).

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Sometimes, defenders of the TCJA will argue that it takes time for new investments to be ordered and installed. But ordering new capital goods can be made as soon as the law takes effect—almost a whole year now. If locking in lower corporate tax rates was supposed to make firms invest more, it’s been more than enough time for the data to be showing up in capital goods orders.

But the picture painted by capital goods orders is no different. The chart below shows the year-over-year change in nondefense capital goods, excluding volatile aircraft. As with investment, growth slowed from 8.8 percent in July 2018 to 7.1 percent in August. Most importantly, there is once again no clear boost in trend coming after the TCJA takes effect, which is what we would see if the TCJA were working as its proponents claimed it would.

Figure B

No evidence the TCJA has increased orders of capital goods: Year-over-year change in nondefense capital goods, excluding aircraft, February 1992 – August 2018

date Nondefense capital goods
Feb-1993 9.17%
Mar-1993 4.64%
Apr-1993 4.83%
May-1993 2.87%
Jun-1993 4.68%
Jul-1993 6.24%
Aug-1993 8.80%
Sep-1993 4.46%
Oct-1993 10.59%
Nov-1993 7.26%
Dec-1993 12.83%
Jan-1994 7.45%
Feb-1994 12.92%
Mar-1994 11.79%
Apr-1994 13.95%
May-1994 13.15%
Jun-1994 16.09%
Jul-1994 13.11%
Aug-1994 12.97%
Sep-1994 13.23%
Oct-1994 13.34%
Nov-1994 14.00%
Dec-1994 6.67%
Jan-1995 18.88%
Feb-1995 10.70%
Mar-1995 11.76%
Apr-1995 8.80%
May-1995 12.96%
Jun-1995 7.66%
Jul-1995 4.42%
Aug-1995 6.97%
Sep-1995 11.06%
Oct-1995 9.41%
Nov-1995 8.39%
Dec-1995 10.90%
Jan-1996 1.30%
Feb-1996 6.46%
Mar-1996 7.99%
Apr-1996 2.83%
May-1996 4.35%
Jun-1996 7.48%
Jul-1996 11.06%
Aug-1996 6.90%
Sep-1996 0.80%
Oct-1996 4.52%
Nov-1996 5.76%
Dec-1996 -0.89%
Jan-1997 8.40%
Feb-1997 10.37%
Mar-1997 8.87%
Apr-1997 14.43%
May-1997 6.77%
Jun-1997 8.57%
Jul-1997 15.52%
Aug-1997 14.68%
Sep-1997 20.71%
Oct-1997 9.56%
Nov-1997 10.07%
Dec-1997 15.04%
Jan-1998 9.34%
Feb-1998 9.35%
Mar-1998 6.42%
Apr-1998 1.57%
May-1998 8.63%
Jun-1998 5.45%
Jul-1998 -3.90%
Aug-1998 -0.99%
Sep-1998 0.19%
Oct-1998 -2.19%
Nov-1998 0.34%
Dec-1998 4.14%
Jan-1999 0.61%
Feb-1999 -1.32%
Mar-1999 3.44%
Apr-1999 5.40%
May-1999 2.12%
Jun-1999 0.04%
Jul-1999 9.54%
Aug-1999 7.07%
Sep-1999 4.94%
Oct-1999 9.11%
Nov-1999 6.34%
Dec-1999 7.62%
Jan-2000 11.92%
Feb-2000 -0.13%
Mar-2000 6.68%
Apr-2000 9.31%
May-2000 6.59%
Jun-2000 15.66%
Jul-2000 2.43%
Aug-2000 4.90%
Sep-2000 5.54%
Oct-2000 3.46%
Nov-2000 1.16%
Dec-2000 -4.43%
Jan-2001 -4.95%
Feb-2001 3.76%
Mar-2001 -8.64%
Apr-2001 -14.86%
May-2001 -11.22%
Jun-2001 -18.84%
Jul-2001 -15.96%
Aug-2001 -16.35%
Sep-2001 -23.97%
Oct-2001 -21.77%
Nov-2001 -17.95%
Dec-2001 -18.01%
Jan-2002 -22.02%
Feb-2002 -17.29%
Mar-2002 -17.84%
Apr-2002 -9.17%
May-2002 -9.93%
Jun-2002 -11.54%
Jul-2002 -7.23%
Aug-2002 -5.87%
Sep-2002 -5.21%
Oct-2002 -1.05%
Nov-2002 -3.99%
Dec-2002 -5.67%
Jan-2003 3.49%
Feb-2003 -2.43%
Mar-2003 8.89%
Apr-2003 -1.33%
May-2003 -0.13%
Jun-2003 2.10%
Jul-2003 -0.10%
Aug-2003 -1.08%
Sep-2003 8.08%
Oct-2003 3.56%
Nov-2003 5.49%
Dec-2003 9.76%
Jan-2004 2.57%
Feb-2004 4.50%
Mar-2004 6.43%
Apr-2004 5.67%
May-2004 3.05%
Jun-2004 6.56%
Jul-2004 8.18%
Aug-2004 2.99%
Sep-2004 8.46%
Oct-2004 5.56%
Nov-2004 5.86%
Dec-2004 6.14%
Jan-2005 15.50%
Feb-2005 12.72%
Mar-2005 2.78%
Apr-2005 11.58%
May-2005 8.99%
Jun-2005 10.35%
Jul-2005 7.37%
Aug-2005 16.04%
Sep-2005 4.03%
Oct-2005 10.64%
Nov-2005 9.70%
Dec-2005 7.92%
Jan-2006 8.16%
Feb-2006 8.81%
Mar-2006 14.89%
Apr-2006 8.81%
May-2006 12.34%
Jun-2006 8.06%
Jul-2006 10.44%
Aug-2006 7.05%
Sep-2006 14.84%
Oct-2006 11.39%
Nov-2006 10.13%
Dec-2006 7.83%
Jan-2007 2.20%
Feb-2007 2.04%
Mar-2007 2.57%
Apr-2007 4.56%
May-2007 0.84%
Jun-2007 2.15%
Jul-2007 1.96%
Aug-2007 2.88%
Sep-2007 -2.67%
Oct-2007 -1.61%
Nov-2007 -1.69%
Dec-2007 3.21%
Jan-2008 6.35%
Feb-2008 4.07%
Mar-2008 -1.09%
Apr-2008 5.17%
May-2008 5.37%
Jun-2008 4.41%
Jul-2008 4.06%
Aug-2008 0.41%
Sep-2008 -2.41%
Oct-2008 -8.75%
Nov-2008 -7.24%
Dec-2008 -18.03%
Jan-2009 -27.68%
Feb-2009 -24.46%
Mar-2009 -25.77%
Apr-2009 -32.33%
May-2009 -28.98%
Jun-2009 -25.63%
Jul-2009 -24.60%
Aug-2009 -24.60%
Sep-2009 -16.89%
Oct-2009 -12.22%
Nov-2009 -12.79%
Dec-2009 -2.12%
Jan-2010 5.75%
Feb-2010 5.89%
Mar-2010 14.48%
Apr-2010 11.81%
May-2010 17.22%
Jun-2010 18.12%
Jul-2010 10.92%
Aug-2010 17.29%
Sep-2010 12.51%
Oct-2010 11.33%
Nov-2010 14.30%
Dec-2010 13.68%
Jan-2011 15.74%
Feb-2011 10.52%
Mar-2011 10.63%
Apr-2011 18.13%
May-2011 11.70%
Jun-2011 5.90%
Jul-2011 15.24%
Aug-2011 10.19%
Sep-2011 9.61%
Oct-2011 16.80%
Nov-2011 7.54%
Dec-2011 10.94%
Jan-2012 11.78%
Feb-2012 17.83%
Mar-2012 12.17%
Apr-2012 9.59%
May-2012 8.38%
Jun-2012 5.57%
Jul-2012 0.10%
Aug-2012 -1.52%
Sep-2012 -2.70%
Oct-2012 -2.66%
Nov-2012 2.68%
Dec-2012 -3.14%
Jan-2013 2.85%
Feb-2013 -4.95%
Mar-2013 -5.18%
Apr-2013 -0.78%
May-2013 -0.03%
Jun-2013 2.57%
Jul-2013 1.63%
Aug-2013 3.04%
Sep-2013 3.98%
Oct-2013 -2.61%
Nov-2013 2.17%
Dec-2013 1.06%
Jan-2014 -2.43%
Feb-2014 1.26%
Mar-2014 3.08%
Apr-2014 -1.48%
May-2014 -4.92%
Jun-2014 1.33%
Jul-2014 2.24%
Aug-2014 3.59%
Sep-2014 4.78%
Oct-2014 1.18%
Nov-2014 -5.73%
Dec-2014 -1.76%
Jan-2015 -3.30%
Feb-2015 -4.38%
Mar-2015 -5.65%
Apr-2015 -3.56%
May-2015 -3.90%
Jun-2015 -8.80%
Jul-2015 -5.16%
Aug-2015 -7.29%
Sep-2015 -8.65%
Oct-2015 -3.70%
Nov-2015 -3.04%
Dec-2015 -8.60%
Jan-2016 -6.03%
Feb-2016 -5.35%
Mar-2016 -6.24%
Apr-2016 -5.35%
May-2016 -5.59%
Jun-2016 -5.61%
Jul-2016 -5.35%
Aug-2016 -2.34%
Sep-2016 -4.98%
Oct-2016 -4.49%
Nov-2016 -2.70%
Dec-2016 0.49%
Jan-2017 0.93%
Feb-2017 3.20%
Mar-2017 4.03%
Apr-2017 4.83%
May-2017 7.77%
Jun-2017 6.53%
Jul-2017 5.93%
Aug-2017 4.58%
Sep-2017 13.29%
Oct-2017 11.88%
Nov-2017 7.24%
Dec-2017 10.50%
Jan-2018 6.18%
Feb-2018 7.54%
Mar-2018 5.66%
Apr-2018 6.79%
May-2018 6.83%
Jun-2018 8.38%
Jul-2018 8.75%
Aug-2018 7.05%
ChartData Download data

The data below can be saved or copied directly into Excel.

Source: EPI analysis of data from U.S. Census Bureau, Manufacturers' Shipments, Inventories, and Orders

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To be blunt, this shouldn’t surprise anyone. The best guess at how the TCJA’s corporate rate cuts will affect the economy is still based on past experience. As we pointed out before the TCJA, there was no reason to believe that corporate rate cuts would trickle down to workers in practice. International evidence shows low corporate taxes aren’t strongly associated with stronger investment, and state level data shows no link between corporate cuts and wage increases. And the increased deficits caused by the TCJA meant that the law as passed was inconsistent with the theory it’s purported to be based on.

Instead, it looks like the TCJA is following the textbook story of crowding out, with the Federal Reserve raising interest rates in response to the additional stimulus in what it believes to be a near full employment economy. While we don’t agree with the current path of Federal Reserve interest rates, it also wasn’t exactly hard to guess that it might raise rates in response to additional fiscal stimulus. Three years ago, we added a section to our analysis of the Congressional Progressive Caucus’s “The People’s Budget” noting that the fiscal expansion we estimate would only occur if the Federal Reserve did not raise rates faster than it otherwise would have in response. And the economy has only gotten closer to full employment since then.

And it’s worth noting just how wildly inefficient and cynically timed this stimulus is. For political gain, congressional Republicans imposed austerity that intentionally throttled the recovery from the Great Recession, causing unnecessary harm to millions of American families. Now that economic growth helps their chances at re-election, they’ve released the choke-hold. And the expansionary effect of the TCJA could’ve been had for about a fifth the cost had Republicans directed its benefits to low- and middle-income families instead of the rich and big corporations.

If Republican’s do win re-election, they made clear even before they passed the TCJA that they’ll try to leverage the increased deficits it caused to demand cuts to the safety net. Indeed, the House GOP budget included deep cuts to education, public investment, Medicare, Medicaid, and the Affordable Care Act. And Republican leaders continue to claim that rising deficits mean that “entitlement reform”—code for “cuts to Social Security, Medicare, and Medicaid”—must be on the table.

Data continues to show that the TCJA has failed to kick start investment, which is the necessary but not sufficient condition for it to increase the pay of typical workers. It should be repealed, rather than the deficits it caused being used as a pretense for deep cuts to programs that working families rely on.

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