The tax cut that time forgot

2019年10月1日星期二

The tax cut that time forgot

OCTOBER 1, 2019

A White House worker preparing for an event marking the six-month anniversary of the passage of tax cut legislation.Tom Brenner/The New York Times

By Paul Krugman

opinion columnist

Traditionally, U.S. presidential elections were decided largely by the performance of the economy in the year or so before Election Day. If G.D.P. was growing fast, it was Morning in America, and the incumbent party won; if there was a recession (as in 2008) or growth too slow to create jobs (as in 1992), the White House changed hands.

But that's unlikely to be the story next year. True, a recession — brought on, say, by a widening trade war — could seal Donald Trump's fate; a boom (coming from where?) could conceivably offset the aura of scandal and possible treason that surrounds his administration. But right now the economy just seems to be bumbling along. True, unemployment is low, but what seems to matter for elections is the rate of change, and that's unimpressive, with growth running at around 2 percent per year.

This wasn't what was supposed to happen. Two years ago Republicans controlled both houses of Congress as well as the White House, and they used that unified control to enact a big tax cut, mainly aimed at businesses, that was supposed to usher in a prolonged economic boom. Reduced corporate taxes, the story went, would induce U.S. companies to bring back the money they've invested overseas, fueling a surge in business investment that would drive up productivity and wages.

Many economists, myself included, thought these claims were greatly exaggerated, that the actual payoff from the tax cuts would be much smaller than advocates claimed. But we were wrong. Almost two years have passed, and it looks as if that tax cut basically had no payoff at all. There hasn't been any visible return of capital from abroad, and business investment has if anything been weak.

How could such a big tax cut — corporate tax receipts have fallen roughly in half! — have had so little effect on business behavior? I see three stories.

First, there may have been some positive effect, but it was outweighed by Trump's trade wars, which have increased uncertainty and deterred investment.

Second, a lot of modern corporate profits probably consist of "rents" — returns to a company's monopoly position, not its past investments. Cutting taxes on these rents doesn't provide an incentive to invest, it just leaves companies with more cash.

Finally, much of what looked like overseas investment by U.S. companies may have been an illusion. Recent research shows that a lot of cross-border money flows are "phantom" investments that are just accounting tricks to take advantage of tax havens. The 2017 tax cut didn't bring a lot of money back home because the money never really left in the first place.

Whatever the mix of reasons, the amazing thing is the way the Trump tax cut has more or less disappeared from our discourse. It was, after all, Trump's only major legislative achievement, and seemed like a big deal. Yet nobody talks about it on the campaign trail, and it's barely mentioned in discussions of our economic prospects.

Remember, this thing is going to add around $2 trillion to our national debt. Yet it appears to have been a big case of money for nothing.

Quick Hits

What the 2017 tax cut's supporters claimed would happen.

The Congressional Research Service on the absence of evidence that the tax cut did much of anything.

The International Monetary Fund on "phantom" international investment.

Official growth numbers arrive with a lag, but you can get an early read from various "nowcasting" efforts, like those of the New York Fed.

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