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Trump Tax Cuts Were Neither Panacea Nor Rip-Off

Published

7 months ago

April 11, 2024

By Karl W. Smith, Bloomberg Opinion (TNS)

Back in 2017, the debate around President Donald Trump’s tax cuts was a case study in how quickly a discussion around legitimate policy can descend into partisan nonsense. On one side, Republicans spouted unfounded claims that the tax cuts would pay for themselves. On the other, Democrats spouted equally unfounded claims that only big business and the wealthy would benefit.

As usual, the truth landed somewhere in the middle. No, the Tax Cuts and Jobs Act of 2017 didn’t pay for itself but at this moment reversing the marquee part of the legislation—lower tax rates for companies—to help narrow the bulging budget deficit is the last thing we should do. And while the cuts yielded benefits to Americans up and down the income scale, the benefits could best be described as modest.

Understanding what the legislation did and didn’t do is relevant now because they expire in 2025, and whoever wins this year’s presidential election will have to decide whether to extend them. What’s not in dispute is that the act represented the most sweeping overhaul the tax system since the Reagan administration. For businesses, it aimed to spur capital spending by slashing the corporate tax from 35% to 21%. For individuals, it lowered rates across the board and simplified the code by limiting itemized deductions, increasing the standard deduction taken by those who don’t itemize and expanding access to the child tax credit.

The problem now is that largely because of fiscal spending to support the economy through the pandemic, the federal budget deficit has expanded to 6.44% of gross domestic product from 4.67% at the end of 2019, which at the time was the biggest shortfall since 2013. Also, the cost of servicing the deficit by borrowing has soared along with benchmark interest rates the last two years. For this reason alone, it’s possible some, but not all, the cuts will reversed. But which ones? Whatever is decided, the corporate cuts are probably the last thing we want to repeal.

Despite the insistence of Republicans, who point to the rise in federal revenue following 2017, we can’t shrink the deficit by further reducing taxes. In 2022, federal revenue came in at $4.9 trillion, far higher than the $4.2 trillion predicted by the bi-partisan Congressional Budget Office before the tax cuts. Two factors are responsible for the outperformance. One, capital gains tax revenue jumped following the stock market’s big rally in 2020 and 2021. Two, a worker shortage during the pandemic caused wages to rise by almost 5% over the course of 2021. Higher wages not only led to higher incomes but also pushed many Americans into higher tax brackets, thereby increasing revenue.

Democrats have described the tax cuts as only benefiting the wealthy. This is also a gross distortion of the facts. Between 2017 and 2019, taxpayers at both the bottom and top of the income scale saw their average tax rate decline by a little less than 1%. Those in between saw more significant reductions, with the upper middle class—defined as those making $200,000 to $500,000 a year—seeing their tax rates decline by 2.5%. This reflects the fact that many of them are small business owners who, along with big corporations, received additional tax cuts designed to encourage economic growth.

In theory, cutting taxes on businesses encourages them to expand production because it increases their after-tax profit margins. Hence, companies are more willing to hire workers and invest in new technology or equipment to boost sales, spurring economic growth.

In practice, many Democrats and even some Republicans were concerned that businesses would use those higher profits to fund stock buybacks or higher dividend payouts to investors. Indeed, buybacks did increase sharply after 2017. For example, Apple Inc. doubled stock buybacks as its investment in the US declined. That was a bad look, but it doesn’t necessarily mean tax cuts didn’t work. If there had been none, Apple might have decided to decrease investment even more to fund stock buybacks.

Teasing out precisely what effect the Trump tax cuts had on a particular company’s investment decisions requires a deep dive into financial and tax records. Four economists from Harvard University, Princeton University, the University of Chicago and the U.S. Treasury Department conducted a detailed analysis of more than 12,000 companies. The results released last month found that companies which experienced larger increases in their return on investment as a result of the tax cut, boosted their investment spending by larger amounts.

With their results, the economists calculated the effect lower tax rates had on the broad economy. Their estimates show that from 2018 to 2023, the Trump tax cuts raised annual investment by a little more than 7%. That equates to an additional $265 billion in private investment in 2023. They also estimated that increased business investment raised the average worker’s wages by about 1%—an income boost roughly equal to what millions of Americans got directly from the tax cuts. Yet, the corporate tax cuts cost $450 billion in the form of decreased federal revenue, compared with $1.1 trillion for individual tax cuts.

The Trump tax cuts were neither an economic panacea nor a rip-off. They produced a modest but meaningful increase in income for working Americans, both by reducing their tax burdens and increasing their wages. Lawmakers should keep this in the front of their minds as they debate how much, if any, of those tax cuts to keep.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

ABOUT THE AUTHOR:

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.

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RightTool Wins 2024 Accountant Bracket Challenge

Published

7 months ago

April 12, 2024

Business Finance News

QuickBooks automation tool RightTool is the champion of the 2024 Accountant Bracket Challenge, presented by Accounting High, as the 3 seed defeated 1 seed CPA Jason Staats, host of the Jason Daily podcast, by a score of 355 votes to 110 votes in the final.

“To everybody in the RightTool Facebook community and all the RightTool users, all of you came together and helped us get the most votes, so I wanted to thank you guys for being the best community in the industry, in my opinion,” said Hector Garcia, CPA, co-founder of RightTool, during the championship final show, which was streamed by Accounting High on YouTube and LinkedIn earlier this afternoon.

RightTool joins accounting and bookkeeping app Uncat as winners of the ABC Tournament. In the inaugural Accountant Bracket Challenge last year, Uncat defeated Staats 339-190 in the championship match.

“I think what we’ve learned is … machines win,” Staats said about his consecutive losses in the tournament final. “We thought that would be down the road, but it’s happening.”

A grand total of 36,831 votes were cast during the three-week tournament.

“This has been so much fun. It only works if other people participate and pay attention and have fun, so thank you to the 1,806 ‘students’ who participated,” said Scott Scarano, an accounting firm owner who founded Accounting High, a community for forward-thinking accountants.

He added that the tournament will return next year, with some tweaks to make it better.

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Tesla to Launch RoboTaxi on August 8

Published

7 months ago

April 12, 2024

Business Finance News

Dana Hull
Bloomberg News
(TNS)

Tesla Inc. plans to unveil its long-promised robotaxi later this year as the electric carmaker struggles with weak sales and competition from cheap Chinese EVs.

Chief Executive Officer Elon Musk posted Friday on X, his social media site, that Tesla’s robotaxi will be unveiled on Aug. 8.

Shares gained as much as 5.1% in postmarket trading in New York. Tesla’s stock has fallen 34% this year through Friday’s close. Shortly before Musk posted the news about the robotaxi, he lost the title of third-richest person in the works to Mark Zuckerberg, CEO of Meta Platforms Inc.

A fully autonomous vehicle, pitched to investors in 2019, has long been key to Tesla’s lofty valuation. In recent weeks, Tesla has rolled out the latest version of the driver-assistance software that it markets as FSD, or Full Self-Driving, to consumers.

The company has said that its next-generation vehicle platform will include both a cheaper car and a dedicated robotaxi. Though the company has teased both, it has yet to unveil prototypes of either. Musk’s Friday tweet indicates that the robotaxi is taking priority over the cheaper car, though both will be designed on the same platform.

Reuters reported earlier Friday that the carmaker had called off plans for the less-expensive vehicle and was shifting more resources toward trying to bring a robotaxi to market. Musk responded by saying “Reuters is lying,” without offering specifics.

Tesla also produced 46,561 more vehicles than it delivered in the first quarter, which has forced it to slash prices. U.S. consumers have been turning away from more expensive EVs in favor of hybrid models, causing many manufacturers to rethink pushes to electrify their fleets.

Splashy product announcements by Musk have always been a key part of Tesla’s ability to gin up enthusiasm among customers and investors without spending on traditional advertising. They don’t always work: the company unveiled the Cybertruck to enormous fanfare in November 2019, but production was delayed for years and the ramp up of that vehicle has been slow.

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(With assistance from Catherine Larkin.)

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Retail Sales and Wages Grew in March

Published

7 months ago

April 12, 2024

Business Finance News

Retail sales grew at a steady pace in March, according to the CNBC/NRF Retail Monitor, powered by Affinity Solutions, released today by the National Retail Federation.

“As inflation for goods levels off, March’s data demonstrates steady spending by value-focused consumers who continue to benefit from a strong labor market and real wage gains,” NRF President and CEO Matthew Shay said. “In this highly competitive market, retailers are having to keep prices as low as possible to meet the demand of consumers looking to stretch their family budgets.”

Total retail sales, excluding automobiles and gasoline, were up 0.36% seasonally adjusted month over month and up 2.72% unadjusted year over year in March, according to the Retail Monitor. That compared with increases of 0.4% month over month and 2.7% year over year in February, based on the first 28 days in February.

The Retail Monitor calculation of core retail sales – excluding restaurants in addition to automobiles and gasoline – was up 0.23% month over month and up 2.92% year over year in March. That compared with increases of 0.27% month over month and 2.99% year over year in February, based on the first 28 days in February.

For the first quarter, total retail sales were up 2.65% year over year and core sales were up 3.12%.

This is the sixth month that the Retail Monitor, which was launched in November, has provided data on monthly retail sales. Unlike survey-based numbers collected by the Census Bureau, the Retail Monitor uses actual, anonymized credit and debit card purchase data compiled by Affinity Solutions and does not need to be revised monthly or annually.

March sales were up in six out of nine retail categories on a yearly basis, led by online sales, sporting goods stores and health and personal care stores, and up in five categories on a monthly basis. Specifics from key sectors include:

Online and other non-store sales were up 2.48% month over month seasonally adjusted and up 15.47% year over year unadjusted.
Sporting goods, hobby, music and book stores were up 0.86% month over month seasonally adjusted and up 8.33% year over year unadjusted.
Health and personal care stores were up 0.03% month over month seasonally adjusted and up 4.5% year over year unadjusted.
Grocery and beverage stores were up 1.17% month over month and up 4.22% year over year unadjusted.
General merchandise stores were up 0.13% month over month seasonally adjusted and up 3.38% year over year unadjusted.
Clothing and accessories stores were down 0.01% month over month and up 2.13% year over year unadjusted.
Building and garden supply stores were down 2.13% month over month and down 3.97% year over year unadjusted.
Furniture and home furnishings stores were down 1.46% month over month seasonally adjusted and down 5.28% year over year unadjusted.
Electronics and appliance stores were down 2.27% month over month seasonally adjusted and down 5.92% year over year unadjusted.

To learn more, visit nrf.com/nrf/cnbc-retail-monitor.

As the leading authority and voice for the retail industry, NRF provides data on retail sales each month and also forecasts annual retail sales and spending for key periods such as the holiday season each year.