US growth, investment and unemployment numbers all look improved under President Donald Trump, but it is still early days to call the full impact of his tax cut package passed two years ago this month.
US growth, investment and unemployment numbers all look improved under President Donald Trump, but it is still early days to call the full impact of his tax cut package passed two years ago this month.
The $2.3 trillion reform was bitterly politically contested.
It lowered the tax rate on corporate profits from 35 per cent to 21 per cent, provided immediate write-offs and lower rates on personal income, among other changes.
The outcome will be of interest to businesses locally, after more modest plans to reduce the company tax rate in Australia hit a political wall.
The latest data from the US Bureau of Economic Analysis shows that country’s GDP growth lifted from 1.6 per cent in 2016 to be 2.4 per cent in 2017 and then 2.9 per cent in 2018.
In the first three quarters of this year, it has averaged 2.4 per cent.
A release from the Council of Economic Advisers said unemployment hit a 50-year low in October, a rate of 3.5 per cent.
“The lowest unemployment rates on record were matched or set in September 2019 for African Americans, Hispanics, and people with disabilities,” the release said.
“Additionally, the unemployment rate for people without a high school diploma fell to 4.8 per cent, the lowest rate since the series began in 1992 and much lower than the 7.8 per cent rate in November 2016.”
But there will be many factors that influence the unemployment and GDP numbers.
Supporters of the tax plan highlighted immediate wage rises and bonuses offered to workers when the laws were passed, with companies such as Walmart and AT&T among those to announce cash for their workforces.
These are short term impacts, however.
The Wall Street Journal, for example, has reported that bonuses were lower in the first part of 2019.
The longer-term benefit for wages will be determined by whether lower taxes incentivise productive investment by businesses.
From growth of 0.6 per cent in 2016, non-residential investment rose 4.4 per cent in 2017 and then 6.4 per cent in 2018, slowing to 0.5 per cent growth so far in 2019.
Academic works also suggest that lower company tax rates flow through to wages.
Hasset & Mather (2006) looked at 72 countries over two decades to 2002, finding a 1 per cent rise in company tax was associated with a 1 per cent fall in real wages.
Felix (2007) analysed 19 developed countries over a similar period and found a 10 per cent increase in the tax rate would lower wages by 7 per cent.
Carroll (2009) reviewed state corporate tax rates across US states for 40 years, and found a $US1 fall led to a $US2.50 gain in real wages.
What about the impact on the deficit?
Company tax revenue projections also tell a fascinating story.
According to the Congressional Budget Office, company tax take was $300 billion in the 2016 fiscal year, projected to reach $443 billion by 2027.
After the tax cut package, corporate taxes contributed $205 billion in 2018 but will grow at a more rapid clip, lifting 11.2 per cent into 2019 nearly doubling to be $398 billion by 2027.
The key takeaway here is that although the rate was cut significantly, company tax revenues will only be 10 per cent lower by 2027.
Similarly, in June 2017, the CBO had projected individual income tax revenue of $2.5 billion in 2025, when many of the cuts will expire under legislative rules, with the most recent forecasts showing a number about 8 per cent lower.
