In a packed arena in Fargo, N.D., this week, President Trump’s most ardent supporters roared with approval when he talked about protecting the U.S. borders, beating the Democrats and “respect for our great, beautiful, wonderful American flag.” When Trump pivoted to the tax bill, his top legislative accomplishment, the crowd clapped — but without the fervor they’d shown for many of his other applause lines.
Trump signed the tax cut legislation just before Christmas. Six months later, it is losing popularity.
American families are unsure if they are actually benefiting from the tax cut, and small businesses say they are confused by the complex changes affecting them. A recent poll from Monmouth University found 34% of adults approved of the tax cut now, a slide from January when adults were about evenly split between approving and disapproving. And only about a third of families say they are better off because of the cuts, according to polls by Politico and the New York Times.
It’s too early to tell if the tax cut is working, most economists across the political spectrum say. There has been a clear burst of optimism since the bill passed, especially among business owners. But that optimism has yet to translate into a substantial bounce in business spending on new factories, equipment and technology.
What’s going well
Supporters of the tax bill point to economic growth as a sign the cuts are working. The U.S. growth rate in the first quarter of this year came in at 2%, the best since 2015, and many independent forecasters anticipate that the growth rate will skyrocket to more than 4% in the second quarter, something that hasn’t happened in four years.
“Our program of economic growth, wages, jobs, unemployment is working. It’s kicking in even faster than almost anyone dreamed possible,” Larry Kudlow, Trump’s top economic advisor, said on Fox Business this week.
The tax bill isn’t the only factor driving the accelerated growth, many experts say, but it’s part of the story. The global economy is doing well and oil prices have rebounded, driving a resurgence in investment in America’s oil and natural gas industry.
What’s not going well — so far
The success of the tax bill hinges on a surge of corporate capital spending. It’s the driver to get growth to stay high for longer than a few months. So far, spending on equipment is lower than it was at the end of last year, and overall business investment was 6.3% in the first quarter, unchanged from 6.3% in the final quarter of 2017.
“If the tax cut is working, it should show up in investment. And it’s hard to see it in investment,” said Benjamin Page, a senior fellow at the Tax Policy Center.
Critics of the tax bill, which every Democratic senator voted against, counter that the faster growth is temporary — and that it comes at a high cost. Most forecasters, including the Federal Reserve, expect the growth to peak this year and fall back to normal by late 2019. In the meantime, the tax bill has left America more than $1 trillion deeper in debt, according to the Congressional Budget Office.
There’s also been no acceleration in wage growth. Though the White House frequently touts announcements that some companies gave bonuses or pay increases, they were not widespread. Wage growth remains sluggish, as it has for years since the recession, according to the Labor Department.
“The missing piece of the puzzle is wage growth. Yes, we are at full employment, but we are still seeing wage stagnation,” said Aparna Mathur, a resident scholar in economic policy studies at the conservative American Enterprise Institute.
The windfall for shareholders
Arguably the harshest criticism of the tax bill is that it’s benefiting one group of Americans a lot so far: shareholders. The hope was that companies would take their extra cash from the tax savings and invest it in new equipment and items that would make workers more productive and boost pay. But the evidence so far is that big companies have mainly been giving cash back to shareholders.
Stock buybacks hit a record in the first quarter of 2018 ($189.1 billion), surpassing the all-time high set in 2007 before the financial crisis, according to Howard Silverblatt of S&P Global. Buybacks jumped nearly 40% from the final quarter of last year.
Companies are also giving more money to shareholders via fatter dividend payments, which also hit an all-time high in the first quarter of 2018. These payments are expected to keep growing.
“For the remainder of 2018, expectations are high for record corporate expenditures in both buybacks and dividends,” Silverblatt said.
Republicans such as Rep. Kevin Brady of Texas, one of the main authors of the tax bill, argue that buybacks and dividends will fuel growth and investment because shareholders will turn around and pour the money into other projects, including startups.
‘Not what was expected’
Trump and Republicans argued that cutting the corporate tax rate to 21% from 35% and allowing companies to write off more of the costs of their capital spending would unleash a frenzy of business spending and that, in turn, would drive up wages as workers become more productive. So far, that hasn’t happened, and surveys of business leaders don’t indicate it’s likely to pick up much more from here.
Morgan Stanley has an index that tracks businesses’ plans for future capital spending. This week Morgan Stanley reported a drop in future plans and declared the United States “past the peak” on capital spending, a worrying sign for those waiting for a pickup.
Similarly, the U.S. Chamber of Commerce and audit firm RSM did a recent survey of 393 businesses and found that only 38% planned to increase investment over the next three years.
“This is not what we expected,” said Joe Brusuelas, chief economist at RSM.
Trade fears may be canceling out tax benefits
Gary Cohn, Trump’s former top economic advisor, has argued that it will take time for the uptick to show up because companies don’t make these decisions without a lot of thought.
But right now there are a lot of incentives for companies to open their wallets and invest in the future: the tax cut, strong growth and a growing labor shortage that may cause businesses to want to bring in robots if they can’t find enough workers.
Many business executives say Trump’s trade conflicts are causing them to pause on big investments until they see what happens.
“There’s a huge question on trade,” said Jamie Dimon, chief executive of JPMorgan Chase & Co. and head of the Business Roundtable, a business advocacy group. Tariffs “cause rising uncertainty, which could weigh down investment and hiring.”
Cohn has cautioned that Trump’s trade moves could wipe out all the gains from the tax cut. It’s a major risk at a time when the tax cut is still a hard sell to the public.
Long writes for the Washington Post.