One thing that became clear as 2018 progressed was that the initial elation over the new 21% corporate income tax rate provided by the Tax Cuts and Jobs Act had been a somewhat hasty reaction.
Tempering the enthusiasm were realizations that other provisions of the law would, for most companies, significantly cut into the windfall from the lower tax rate.
Such provisions included the Global Intangible Low Taxed Income (GILTI) calculation, the Base Erosion and Anti-Abuse Tax (BEAT), new limitations on the deduction for business interest expense, and new limitations on deductions for employee benefits.
Indeed, it’s hardly a snap to determine whether the overall net impact of the TCJA to date has been positive or negative for companies, a report by Deloitte suggests. The report offers both an “optimist’s view” and a “skeptic’s view” for each of four key areas affected by the law:
From the optimist’s viewpoint, Deloitte noted, capital investment by S&P 500 companies increased by 8.9% for the year — the highest rate in seven years, which the Congressional Budget Office attributed partly to the TCJA. Additionally, the Small Business Optimism Index was near the highest levels in its 45-year history throughout the year and set a new high in August.
On the other hand, skeptics can point to the CBO’s projection that the law’s effects on business investment growth will wane between 2019 and 2022. Also, while spending on capital improvements was up vs. 2016 and 2017, such growth wasn’t as strong as in previous economic expansions.
On the plus side, Deloitte pointed out, the CBO revised upward its estimates for economic output, forecasting that the TCJA would boost average annual real GDP 0.7% over the 2018-2028 period.
As well, in the second and third quarters of last year, the United States recorded its most robust GDP growth in back-to-back quarters since 2014 (4.2% and 3.5%, respectively), according to the CBO.
In this area, however, the skeptics may have the upper hand. The federal deficit ballooned in fiscal 2018 by 17%, reaching $779 billion. The deficit, on top of expectations of higher inflation stemming from the tax stimulus, “have already led to higher long-term interest rates and could impinge [economic] growth,” Deloitte wrote.
Indeed, the Federal Reserve forecasts GPD growth of just 2.5% this year and 2% in 2020.
Wage growth is good for corporate health, as people have more money to spend. In 2018, due partly to tax-code changes, average hourly earnings increased by 81 cents, or 3.1% for the year. Some of the largest U.S. companies hiked their minimum wages, as did some states.
Yet wage growth was still below what most economists expect from a strong economy. During the 1990s economic boom, growth was regularly 3.5% to 4%. And some of the current wage growth has been negated by the new tariffs, especially on consumer goods imports from China.
Optimists may claim that the same tax-code changes that gave consumers more disposable income caused companies to increase their hiring activities. By year-end, the unemployment rate stood at just 3.7%.
Also, about 278,000 manufacturing jobs were created in the 12 months through September 2018, more than double the number in the same period a year earlier.
But skeptics will point out that the unemployment rate was already falling prior to the TCJA’s passage in December 2017 — and in fact had been dropping steadily since 2010. Even more to the point, the labor force participation rate barely moved in 2018, remaining at about 63%.
In summary, Deloitte offered that “although the new tax law’s journey through Congress may have felt like a sprint, navigating the impact of tax reform is clearly turning out to be a marathon.”