By Robert Duquette, CPA
This is part three of a five-part blog series analyzing what was promised when the Tax Cuts and Jobs Act (TCJA) was enacted compared with what has actually happened to date. To make your reading and consumption of all this information easier, this analysis covers 13 topics and is presented in five separate blogs.
In my previous blogs I covered …
In this blog I address …
Each issue will be reviewed with independent data, and I will conclude with my own personal verdict and opinion (not that of the PICPA) as to whether that goal was achieved and if the TCJA has been successful so far.
Businesses to Share Tax Savings with Workers through Increased Wages
When the TCJA was passed, the Trump administration and congressional leaders insisted that the tax savings for businesses would predominantly benefit workers. The Council of Economic Advisers estimated that 70% of business tax changes were expected to be shared with workers and increase annual wages for families by an average of $4,000, with the chair of the council predicting it could be as high as $9,000 annually. Note that several other studies at the time had predicted the opposite: that most of the tax savings would go to share buybacks and dividends.
In actuality, according to the Congressional Research Service (CRS) and based on Department of Labor statistics for 2018, average weekly wages of production and nonsupervisory workers had increased by about $22 (or 3%) to $766 in 2018 over 2017, or about $1,248 annually. Accounting for normal wage growth from inflation and normal productivity that would otherwise have occurred without tax reform, the real growth rate on wages was therefore only 1.2%.
One study from the National Bureau of Economic Research concluded that only about 4% of public companies announced that they would pay additional wages or bonuses due to tax reform. According to the CRS, although there was much press coverage about companies paying large bonuses around the time of the enactment of TCJA, one organization that tracks these bonuses, Americans for Tax Fairness, reported a total of $4.4 billion being paid in bonuses from the time of enactment in late 2017 through April 5, 2019. The CRS concluded that these bonuses amounted to only 2% to 3% of the corporate tax cut, “consistent with what most economists would expect that a small percentage of increased corporate profits or repatriated funds (if any) would be used to compensate workers,” and that “the bonus announcements could have reflected a desire to pay bonuses when they would be deducted at 35% rather than 21%, or the result of a tight labor market and attributed to the tax cut as a public relations move.”
Therefore, if the business tax savings did not substantially increase wages or bonuses to workers, where did it go? According to Americans for Tax Fairness, most of the tax savings seems to have funded a record-breaking amount of stock buybacks. Over $1 trillion in buybacks were announced by the end of 2018, which is similar to what happened in 2004 when a “tax holiday” on repatriated funds allowed firms to voluntarily bring back earnings at a lower rate.
Sharing Tax Savings with Workers Goal Achieved?
Allow Unprecedented Capital Expensing
As discussed above, it appears most of the tax savings funded share buybacks, not worker’s wages. But what about the goal of enticing capital investment?
The TCJA provided businesses with both a significant rate cut and a 100% immediate expensing of new or used machinery and equipment additions, as well as low-to-no tax on foreign earnings. Therefore, wouldn’t some of the tax savings have been reasonably expected to expand nonresidential fixed investments? The National Association of Business Economics (NABE) concluded earlier this year that tax reform did not impact capital investment. In fact, the NABE quarterly survey at the end of 2018 found that businesses reported less growth in sales, pricing, and profit margin; 84% of respondents claimed the TCJA did not change hiring or investment plans; and cash from the tax cut went primarily into buybacks, not capital investment and additional hiring.
The CRS reported recently that for 2018, although there was 7.5% growth in equipment purchases and 5% in structures, most of that growth occurred in the first half of 2018 and appears to be declining.
Capital Investment Goal Achieved?
Not to the extent originally envisioned. Although tax reform did allow for unprecedented levels of immediate expensing, a substantial rate cut, and a low-to-no tax on foreign earnings, these incentives did not produce long-lasting capital expensing behavior in the economy. This could be because, based on my experience, tax incentives alone do not drive capital expansion plans. Other challenges affecting these decisions include not having enough skilled and unskilled workers to operationalize additional capital expenditures into expanded or additional product lines; potential investments would not provide an adequate return compared with their cost of capital; and there may be too much uncertainty over future business conditions. For example, the already imposed and threatened tariffs by the United States and our trading partners are forcing businesses to evaluate numerous business-growth-affecting considerations: will they be able to pass on any tariff costs to consumers, creating inflation; where will consumers get the cash to afford the higher priced items; will U.S. and foreign consumers buy less due to price increases; and should businesses change suppliers to avoid new tariffs?
Establish More Permanence in the Tax Code
The TCJA provisions for individual taxation, including the 20% pass-through qualified business income deduction, all expire at the end of 2025. This crucial point is often overlooked. According to the Tax Foundation, this means, starting in 2026, almost all individual taxpayers will face a significant tax increase for which they have not planned. National politicians will be reluctant to allow this to happen, but no one knows what the political, economic, and fiscal debt climate will be at that time.
Unless Congress changes things, almost all business provisions will not expire (except for the 100% bonus expensing on machinery and equipment, and there are rate phase ins and outs in the way several base erosion provisions affecting multinational corps will be calculated). Of course, a new Congress after the 2020 election could make significant alterations to the rates and other TCJA changes if more revenues are needed and the political climate supports it.
Permanence in the Tax Code Goal Achieved?
No. Based on an understanding of the expiring provisions and the political reality of having a new Congress every two years and, potentially, a new president every four years, changes to the TCJA as it currently stands seems inevitable over the next decade, if not sooner.
In my next blog, I continue with discussions on the TCJA goals of …
In the final blog of the series I will cover the following:
Robert Duquette, CPA, is Professor of Practice in the College of Business at Lehigh University, a member of the Griffin/Stevens & Lee Tax and Consulting Network, and a retired EY tax partner. He has served on PICPA’s Federal Taxation Committee for over 25 years, focusing on federal tax reform and the national debt.
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