$1.5 Trillion Corporate Tax Cut Scorecard: 84% of Companies Won't Expand Capex

Mish

The administration claimed companies would expand their businesses following the TCJA Tax Cuts & Jobs Act. Let's check.

A National Association of Business Economics’ (NABE) surveys shows the $1.5 trillion U.S. Tax Cut has No Major Impact on Business Capex Plans.

The Trump administration’s $1.5 trillion cut tax package appeared to have no major impact on businesses’ capital investment or hiring plans, according to a survey released a year after the biggest overhaul of the U.S. tax code in more than 30 years.

The National Association of Business Economics’ (NABE) quarterly business conditions poll published on Monday found that while some companies reported accelerating investments because of lower corporate taxes, 84 percent of respondents said they had not changed plans. That compares to 81 percent in the previous survey published in October.

The White House had predicted that the massive fiscal stimulus package, marked by the reduction in the corporate tax rate to 21 percent from 35 percent, would boost business spending and job growth. The tax cuts came into effect in January 2018.

The NABE survey also suggested a further slowdown in business spending after moderating sharply in the third quarter of 2018. The survey’s measure of capital spending fell in January to its lowest level since July 2017. Expectations for capital spending for the next three months also weakened.

Where did the Money Go?

  • Stock buybacks
  • Dividends

The buybacks were a waste because valuations are insane. We did get something out of this: more debt.

The CBO says GOP Tax Law Will Add $1.9 Trillion to Debt.

According to the report, the tax law would cost the government $2.3 trillion in revenues, but economic growth would offset that figure by about $461 billion.

And as tax cuts go, this one was hugely one-sided. The middle class got peanuts.

The growth won't happen and the lost revenues will likely be worse. There were no spending cuts, and we did not even see the typical lie both sides employ: "This will pay for itself".

I am in favor of reduced taxes. But I am also in favor of balanced budgets.

Republicans are always in favor of spending cuts, provided Democrats are in charge.

Mike "Mish" Shedlock

Comments (19)
No. 1-14
KidHorn
KidHorn

Clearly the tax cuts won't pay for themselves, but, it was a smart political move. Are the democrats going to run on a platform of raising taxes?

shamrock
shamrock

Maybe they aren't investing because nobody knows what the tariff and trade policies will be from week to week.

Curious-Cat
Curious-Cat

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." - Alexis de Tocqueville (in Democracy in America)

pi314
pi314

As someone who believes in the free market, are you suggesting that more companies should expand capex? Are you against the free market outcome?

Also, these so called corporate taxes, especially the overseas trillions, would never have been collected anyway. The 'tax cut' allows the U.S. to actually collect those taxes. That is infinitely better than collecting zilch from these 'evil' corporations in the past two decades.

Mish
Mish

Editor

"As someone who believes in the free market, are you suggesting that more companies should expand capex? Are you against the free market outcome?"

It might behoove you to take reading comprehension lessons. Where did I tell companies what to do? Where did I even hint at that? Rather, I stated a claim that was made and it didn't happen.

thimk
thimk

this act was the one that trump should have refused to sign unless there was an accompanying cost cuts/offsets. Funny how the repubs managed to pass this yet they are feckless on other issues.

Carl_R
Carl_R

"The buybacks were a waste because valuations are insane." As I have shown before several times, stock buybacks are mathematically equivalent to dividends. The price of the stock is irrelevant. If necessary, I'll be happy to go through the math again, but the short version is that, if a company buys back 10% of it's stock, and each stockholder sells 10% of their stock, after the transaction, the stockholders have money, and they have the exact same proportional interest in the company.

If a stockholder declines to sell any shares, the result is exactly the same as if they received a dividend, but reinvested it via a dividend reinvestment program. After the transaction, they don't have cash, but they do have a higher proportional ownership in the company, just as they would with dividend reinvestment. Would they be better off taking the cash now, and hoping the stock falls before they buy? Maybe, but if so, they would be better off selling their entire stake now, and buying it back later, "if" the stock falls. That's a gamble, and it's irrelevant to the statement that I made above: A stock buyback is mathematically identical to a dividend. The only differences are potentially different tax ramifications to the recipient, and transaction costs (selling 1% of your holding does involve costs).

douglascarey
douglascarey

Mish, you are clearly against the tax cuts. So does this mean you think taxes should be raised? Or were taxes just perfect before the changes in 2017? And don't say you want balanced budgets with it. We won't have those. So given what we have, do you want higher tax rates, lower tax rates, or exactly what we had in 2016?

Sechel
Sechel

rarely have we seen economists predict an action and that we find out the results were exactly as predicted. score one for the dismal science

Mish
Mish

Editor

"Mish, you are clearly against the tax cuts" No I was against that set of tax cuts even though it contained pass-through provisions that benefitted me.

I do not believe the distribution was at all fair. And it added close to 2 trillion (it will be more) to the deficit.

I favor a flat tax + a consumption tax combination. I would not tax food, medicine. If I had my way I would cut the military budget in half, at least.

Mish
Mish

Editor

"and each stockholder sells 10% of their stock, after the transaction, the stockholders have money, and they have the exact same proportional interest in the company" Good Lord - since when do stockholder sell stock after buybacks

Mish
Mish

Editor

Stock Buybacks have another serious issue. They are most often used to hide insane levels of executive options who sell into the buyback. Massive shareholder dilution is hidden.

WildBull
WildBull

Why is this a big surprise?? This capital flight has been going on since the 1970s. Corporate management has read the tea leaves and they see no return on investment in the US. Taxes are too high, regulations are crushing. Investing in China is no great thing either. The plant and equipment end up on Chinese soil, they take your IP and don't let you repatriate a single buck. So, yeah. Load your company up with debt, cash out personally, buy a yacht and get a trophy wife. Sounds like the winning strategy to me.

frozeninthenorth
frozeninthenorth

The only issue is on what planet did anyone live over the past few years. Really for the past few years, stock buyback has been the only game in town. Even last year in a Fortune presentation where lots of CEOs were present only two CEO said they intended to increase CAPEX, the rest was direct to stock buyback and add more debt. There is excess capital in the US, that companies are reluctant to spend on marginal and long term projects


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