Opinion: 2017 tax cuts a wasted opportunity
The real cost to the 2017 tax cut likely lies ahead of us. Policy makers and voters should ask themselves: If we’re running a $1 trillion deficit now, at “full-employment”, what happens to federal revenue, and our ability to invest, when the economy materially weakens? U.S. public debt to GDP is now at roughly 85%, and is on track to reach 100% by the end of this decade, a level economists often cite as a danger zone.
The data is in and it shows, thus far, that cutting taxes, and borrowing the shortfall, did not purchase any additional economic growth. The growth in national debt is higher than the growth in nominal GDP.
The stated “public” cause put forth to justify the 2017 tax-cut was a material increase in the nation’s economic growth rate, some proponents suggesting that it would hit 4% as a result of the cuts. In fact, U.S. gross domestic product (GDP) grew 2.4% in 2017, bumped up to 2.8% in 2018, and is estimated to have grown 2.3% in 2019. Wall Street’s leading economists now estimate that the economy will grow 1.9% in 2020. In other words, the country’s economic growth rate did not change from its long-running mid-2% level.
Of course, and happily, the unemployment rate has continued to drop, but the data makes abundantly clear this is simply a continuation of an employment trend line solidly in place since mid-2013 when the economy began to consistently add roughly 200,000 jobs per month. Moreover, the overall labor participation rate is right where it was when President Trump took office — 63%.
In reality, the tax cut was really a corporate tax giveaway, not a GDP force multiplier, implemented at a time when corporate America was already experiencing record profits. Corporate taxes as a percentage of GDP plunged 33% from 2017’s 1.5% to 1% in 2018 — and 1.5% was already below the past 25-year average of 1.8%. Individual tax collections as a percentage of GDP were unchanged at 8.3% in 2018 compared to 2017.
Consider, the Institute of Taxation and Economic Policy just released a study indicating that 91 companies in the Fortune 500, all of them profitable, paid no federal taxes in 2018. Total federal tax collections are now running at about 16% of GDP, near an all-time low since 1950. This is an extraordinarily low number in the context of the current unemployment rate. Moreover, an aging population creates greater demand for government spending. The U.S. median age now is up 30% since 1960.
As a candidate, President Trump claimed the then $19 trillion national debt was a disgrace that he would eliminate over eight years, if elected. Today, the CBO projects that $9 trillion will be added to the nation’s debt over eight years under current projections.
What did corporations do with their tax windfall? Evidently lacking sufficient capital expenditure ideas, public companies have been engaging in stock buybacks, which reached an all-time high in 2018; buybacks were down in 2019, but they were still the second highest on record.
In other words, these companies didn’t really need the extra money since buybacks were often found to be a more attractive investment than plant, equipment, research or raising worker pay in any meaningful way.
To be clear, there’s nothing inherently wrong with debt. The question, in business and government, is the same: What is the return on investment? The Eisenhower administration took on debt to build the nation’s highways that were instrumental in assuring shared prosperity. President Reagan levered up to help win the Cold War. President Obama’s Affordable Care Act expanded health insurance coverage to over 20 million Americans.
This additional borrowing could have been used to upgrade the nation’s infrastructure, or increase our overall research and development efforts. Broadly shared public goods could have been purchased that strengthened the country’s foundation. Instead, corporate balance sheets simply got fattened.
Jim Roumell is president of Roumell Asset Management and chairman of the Investment Committee of the Wayne State University Endowment. In the mid-1970s, he proudly delivered The Detroit News.