The Strategist

US tax reform is losing momentum

01/30/2019 - 10:32

A year after the launch of a large-scale tax reform in the United States, its impact on companies' expectations regarding the amount of capital investment has declined dramatically. According to the US National Business Association, 84% of US companies now believe that tax cuts do not lead to increased employment and investment. At the same time, most businessmen are still optimistic about prospects for the country's economy, expecting its growth in 2019.

Thad Zajdowicz via flickr
Thad Zajdowicz via flickr
According to results of a quarterly business survey conducted by the National Association of Business Economics (NABE), a year after the tax reform came into force, 84% of companies noted that fiscal exemption does not lead to an increase in capital investments or changes in hiring plans. In the October survey, the proportion of respondents who shared this opinion was 81%. At the same time, 50% of representatives in the manufacturing sector reported an increase in investment, and 20% said that their firms had adjusted staff and investment plans, focusing on the US instead of foreign countries.

Recall the reform in the United States provided for a reduction in corporate tax from 35% to 21% and a number of other benefits. This resulted in a total reduction in the burden of $ 1.5 trillion, and the revision of the tax code has become the most ambitious in more than 30 years. "After a year of rapid growth in the level of capital investments, some cooling is observed, expectations for the next three months have weakened," said NABE head Kevin Swift. "A smaller number of companies are increasing their investments compared to the October survey." In addition, 77% of companies said that trade disputes between Washington and other countries did not lead to changes in their investment plans, expectations of hiring and pricing (this result is similar to conclusions made in October). As for those who noted negative impact of the protectionism, their number turned out to be more than the average for the economy.

Almost none of the respondents expected a recession within 12 months, and 64% of them forecast an increase in GDP of more than 2%. However, in the last survey, the share of such optimists was significantly higher - 90%. Moreover, there are less than before respondents that speak of growing sales in the fourth quarter of 2018 - only 47% versus 61% in the third quarter (17% versus the previous 6%, while declining sales). The material costs of companies have increased, especially with those who purchase finished products (at the same time, prices of the companies themselves have not yet risen as two thirds of respondents said). Profit growth also became a much rarer occurrence among businessmen surveyed (now it is noted only by 23%, and 20% have declared its decline). At the same time, 53% of entrepreneurs talk about labor shortages (against 47% in October), which is a record since October 2000. As a result, the level of employment in the fourth quarter continued to grow, and so did salaries.