The Trump Tax Cut Did Not Impact Capital Investment —— 84% Enterprises Do Not Intend To Expand Capital Spending

A year ago, in January 2018, the Trump administration unveiled its biggest tax cut in more than 30 years – a $1.5 trillion tax cut to boost corporate spending and job growth.

However, a recent survey showed that the massive fiscal stimulus did not seem to have a significant impact on capital investment or recruitment plans.

A quarterly survey of business conditions released Monday by the National Association Of Business Economics (NABE) found that although some companies reported accelerated investment due to tax cuts, 84% of the companies surveyed said that, after a year, the tax cut did not make them change their hiring or investment plans.

In the last survey published in October last year, the proportion was 81%. That is to say, compared with the results of last October’s survey, the number of enterprises that have increased their capital expenditure has decreased.

The NABE survey also showed that corporate spending slowed further after a sharp slowdown in the third quarter of 2018. In January, the survey’s capital spending targets fell to their lowest level since July 2017. Expectations of capital spending in the next three months have also waned.

However, although corporate spending has not been boosted as expected, employment growth has improved. The survey showed a slight improvement in employment growth in the fourth quarter of 2018 over the third quarter. Slightly more than a third of the companies surveyed said their company’s employment had increased in the past three months, up from 31% in the October survey. However, the survey’s forward-looking employment indicators fell from 29 in October to 25 in January.

Where’s the money?

In fact, the tax cuts did not significantly stimulate business investment or pay wages, nor did they translate into the potential of future economic growth, but were used by listed companies to increase dividends and strengthen stock repurchases. The proceeds were transferred to the shareholders.

A study shows that in 2018 the U.S. stock market buybacks reached about $800 billion. It’s noted that the scale has reached an all-time high, 36% times higher than the record set in 2007. Goldman Sachs said that the total share buybacks of American enterprises exceeded 1 trillion dollars in 2018.

According to Lance Roberts, an economist of Clarity Financial, the growth in corporate profits comes mainly from cost reduction and other financial operations rather than real growth in revenue. The increase in revenue is directly linked to the consumer-driven economic growth, which has remained largely unchanged in the past.

On the other hand, tax cuts have snowballed America’s debt.

After the 2008 financial crisis, treasury bonds have been rising at an accelerated pace. Congress and the Obama administration approved stimulus money to keep the economy running. At the beginning of Trump’s term, debt began to stabilise, but with tax cuts in late 2017, the sharply reduced corporate tax rate reduced U.S. government revenue. Debt bounced back again last year.

The Congressional Budget Office reported in April last year that a large portion of the debt was about 1.9 trillion dollars between 2018 and 2028. It will come from the tax cuts and jobs bill.

The report said the tax cuts would cost the government $2.3 trillion in revenue, but only about $461 billion in economic growth.

The Treasury Department’s latest figures show that the national debt stood at $21.974 trillion by the end of 2018, an increase of $2 trillion over Trump’s presidency.

Data from the 2008 budget also show that public debt accounted for 78% of America’s  GDP in fiscal year 2018, the highest level since 1950. The deficit as a share of GDP jumped from 3.5% in 2017 to 3.8% in 2018.

As the FED continues to raise interest rates, the market is worried that the interest costs of these debts may become an increasingly heavy burden on the U.S. government.

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