In a packed arena in Fargo, N.D., this week, President Donald Trump’s most ardent supporters roared with approval when he talked about protecting the U.S. borders, beating the Democrats and “respect for our great, beautiful, wonderful American flag.” When Trump pivoted to the tax bill, his top legislative accomplishment, the crowd clapped — but without the fervor they had shown for many of his other applause lines.
Trump signed the tax cut legislation just before Christmas. Six months later, it is losing popularity.
American families are unsure whether they are benefiting from the tax cut, and small businesses say they are confused by the complex changes. A recent poll from Monmouth University found 34 percent of adults approve of the tax cut now, a slide from January when adults were about evenly split. And about a third of families say they are better off because of the cuts, according to polls by Politico and the New York Times.
It’s too early to tell whether the tax cut is working, most economists say. There has been a clear burst of optimism since the tax cut passed, especially among business owners. But that optimism has yet to translate into a substantial bounce in business spending.
What’s Going Well After the Tax Cut
Supporters of the tax bill point to economic growth as a sign the cuts are working. The U.S. growth rate in the first quarter of this year came in at 2 percent, the best first quarter since 2015, and many independent forecasters anticipate the growth rate will skyrocket to more than 4 percent in the second quarter, something that hasn’t happened in four years.
“Six months ago, we unleashed an economic miracle by signing the biggest tax cuts and reforms,” Trump said on Friday at an event celebrating the tax cuts at the White House.
The tax bill isn’t the only factor driving the accelerated growth, many experts say, but it is part of the story. The global economy is also doing well, and oil prices have rebounded, driving a resurgence in investment in the United States’ oil and natural gas industry.
What’s Not Going Well — So Far
Critics of the tax bill, which every Democratic senator voted against, counter that the faster growth is likely to be temporary — and that it comes at a high cost. Most forecasters, including the Federal Reserve, anticipate the growth will peak in 2018 and fall back to normal by late 2019. In the meantime, the tax bill will leave the country more than $1 trillion deeper in debt over the next decade, according to the Congressional Budget Office.
The success of the tax bill hinges on a surge of corporate capital spending. If that doesn’t come through, the Trump administration is unlikely to get the 3 percent growth it’s predicting for years to come. So far, spending on equipment is lower than it was at the end of last year, and overall business investment was 6.3 percent in the first quarter, unchanged from the 6.3 percent in the final quarter of 2017.
“If the tax cut is working, it should show up in investment. And it’s hard to see it in investment,” said Benjamin Page, a senior fellow at the Tax Policy Center.
There also has been no acceleration in wage growth. While the White House frequently touts announcements that some companies gave bonuses or pay increases, they were not widespread.
Wage growth remains sluggish, as it has for years since the recession, according to the Labor Department.
The Windfall for Shareholders
Arguably the harshest criticism of the tax bill is that it’s benefiting one group of Americans a lot so far: shareholders. The hope was that companies would take their extra cash from the tax savings and invest it in new equipment and items that would make workers more productive and boost pay. But the evidence so far is that big companies mainly have been giving cash back to shareholders.
Stock buybacks hit a record in the first quarter of 2018 ($189.1 billion), surpassing the all-time high set in 2007 before the financial crisis, according to Howard Silverblatt of S&P Dow Jones Indices. Buybacks jumped nearly 40 percent from the final quarter of last year.
Companies also are giving more money to shareholders via fatter dividend payments, which likewise hit an all-time high in the first quarter of 2018. These payments are expected to keep growing.
“For the remainder of 2018, expectations are high for record corporate expenditures in both buybacks and dividends,” Silverblatt said.
Trade Fears May Be Canceling Out Benefits
Gary Cohn, Trump’s former top economic adviser, has argued that it will take time for the uptick to show up, because companies don’t make these decisions without a lot of thought.
But right now there are a lot of incentives for companies to open their wallets and invest in the future: the tax cut, strong growth and a growing labor shortage that may cause businesses to want to bring in robots if they can’t find enough workers.
Many business executives say Trump’s trade war is causing them to pause on big investments until they see what happens.
“There’s a huge question on trade,” said Jamie Dimon, chief executive of JPMorgan Chase and head of the Business Roundtable, a business advocacy group. Tariffs “cause rising uncertainty, which could weigh down investment and hiring.”
Cohn has cautioned Trump’s trade moves could wipe out all the gains from the tax cut. It’s a major risk at a time when Trump’s tax cut is still a hard sell to the public.