Chart of the Week: Analyzing the Impacts of the TCJA

Chart TCJA

When the Tax Cuts and Jobs Act (TCJA) was enacted in late 2017, arguably the largest beneficiaries were U.S. corporations. The TJCA cut the corporate income tax rate from 35% to 21%. This lower tax rate provided corporations with a huge one-time boost to their earnings. While no one can argue that the short-term benefits from the tax cut were very robust, the longer-term benefits are much less certain. Proponents of the TJCA argued that the tax reform would provide a meaningful boost to long-term growth, as companies would take excess earnings and invest back into their businesses via capital expenditures, thus brightening the future growth outlook. While business investment did pick up some over the last few years, we have certainly not seen an investment boom that many pundits predicted. In the chart above, the gold line represents year-over-year growth in durable goods orders which can be thought of as a proxy for business capital expenditures, while the black line shows year-over-year earnings growth of S&P 500 companies. As you can see, we did get a very strong boost to earnings growth; however, the predicted surge in business investment never materialized. Instead of accelerating investment, it appears that many businesses opted instead to return capital to shareholders via dividends and share buybacks. While dividends and buybacks help to boost short-term returns for investors, they provide little to no long-term benefit. As of today, it appears the promised long-term benefits from the TJCA have not come to fruition.