Congressional Research Service Report Says TCJA Did Little to Boost Economy

By:
Chris Gaetano
Published Date:
Jun 3, 2019
TCJA - GettyImages-897796656

A report from the Congressional Research Service (CRS) said that, more than a year after its enactment, the Tax Cuts and Jobs Act (TCJA) has had little effect on the economy, and, despite predictions otherwise, it is far from paying for itself through increased revenues. 

The report noted that, last year, the Congressional Budget Office projected the gross domestic product (GDP) to grow by 3.3 percent; without the TCJA, the CBO said its projections would have been 3.0 percent. However, the CRS report noted that GDP growth last year was actually 2.9 percent, "which is consistent with a small effect of the tax revision, perhaps even smaller than projected by most analysts." On the whole, this indicates that the tax cuts had a "relatively small (if any) first-year effect on the economy," and while the report said that the relationship between tax cuts and GDP growth is not an exact science, it noted that the results "tend to rule out very large effects in the near term." 

The report found that consumer spending did increase, but only by marginal amounts, going from 2.5 percent growth in 2017 to 2.6 percent growth in 2018. As to why consumers did not spend their tax savings as much as projected, the report said that "[much] of the tax cut was directed at businesses and higher-income individuals who are less likely to spend. Fiscal stimulus is limited in an economy that is at or near full employment." 

While fixed nonresidential investment did increase by 7 percent, the report was hesitant to attribute this to the tax cuts. First, it noted that investment rates tend to have wide variation from year to year in general, and so it is difficult to point to specific causative factors. Second, the biggest increases took place in the first and second quarters of 2018, "which allowed very little time to be the result of investments that must be planned in advance (even if the tax cut was anticipated in late 2017)." Finally, the types of investments that grew were inconsistent with what someone would expect, observing the TCJA's effects. Looking at changes in the user cost of capital, which "reflects the required rate of return at the margin (i.e., for an investment that earns just enough to be worth making)," one would expect investments in equipment (which fell 2.7 percent) and buildings (which fell 11.7 percent) to be the leading investments. However that honor fell last year to intellectual property, which actually saw a 3.4 percent increase to the user cost of capital. 

"Looking at changes in the user cost of capital, effects of investments in structures would be expected to be largest, with small (or negative) effects on intellectual property," said the report.  "To date this pattern has not been observed,"

In terms of government revenue, the report noted that projections were more or less accurate, off by just $9 billion, but the distribution of these revenues came more from increased individual income taxes than from corporate taxes: last year saw a $45 billion increase in individual income tax revenue, as well as a $40 billion decline in corporate revenues. Corporations, which had been paying an effective tax rate of 17.2 percent in 2017, saw a sharp decline in 2018 to an effective 8.8 percent tax rate. On the individual side, the increase in the standard deduction and child and dependent credit was roughly offset by the elimination of the personal exemption, leading to a change in effective tax rate from 9.6 percent in 2017 to 9.2 percent in 2018. 

On wages, the report said that last year did see a small uptick in compensation, with the nominal growth rate being 3.2 percent. However, when inflation was taken into account, the increase in real wages amounted to about 1.2 percent, which is "smaller than overall growth in labor compensation and indicates that ordinary workers had very little growth in wage rates." While there had been predictions that companies would use the tax windfall to increase compensation, the report said that the majority of their savings went instead to stock buybacks. The total amount of money devoted to increasing compensation amounted to roughly $28 per worker. 

Finally, while there had been predictions that the TCJA would pay for itself through higher tax revenues from economic growth, the report said this didn't really happen. GDP would have needed to increase by 6.7 percent from the tax cuts alone for this to have worked. However, the feedback effect was measured to be closer to 0.3 percent, which is just 5 percent of the growth needed to fully offset the revenue loss. 

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