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This week in Trumponomics: Tax-cut blowback

Rick Newman
Senior Columnist

The tax cuts President Trump signed into law in 2017 were supposed to stimulate business spending and raise family incomes. Critics warned they’d also lead to damaging unintended consequences.

We will be watching for years to assess the long-term impact of the tax cuts, but some new data shows a boost in incomes for some workers was temporary, while changes in deduction rules cut into charitable giving. The tax cuts are generally unpopular, because many voters think they favored businesses and the wealthy over the middle class. Trump will have to persuade voters the tax cuts helped ordinary families to have a decent shot at reelection in 2020.

Hundreds of companies gave their workers bonuses last year, to share the wealth as their tax bills declined. But most of them only did it once. New Labor Department data shows that bonuses rose 13.2% during the first quarter of 2018, compared with the year before, as bonuses triggered by the tax cuts kicked in. But bonuses dropped by 23% in the first quarter of 2019, the biggest drop in the data series, which begins in 2004. Bonuses are back to the levels of 2015, well before the tax cuts.

Other numbers gathered by Giving USA show that charitable donations from individuals fell 1.1% in 2018, to $292 billion. That’s a small drop, but it’s the worst decline since the recession year of 2009. And the drop in giving came during a year in which the economy grew 2.9% and employment increased by 2.7 million jobs. Changes in the tax law reduced the deductibility of state and local taxes, leading fewer people to itemize deductions. Since charitable donations are deductible, some taxpayers most likely did the math and realized they wouldn’t get the tax benefit of donating. So they gave less.

Neither of these developments is terrible, but they contribute to the emerging picture of a tax-cut law failing to perform as promised. For these reasons, this week’s Trump-o-meter reads WEAK, the third-lowest reading.

Source: Yahoo Finance

Don’t bet on a calm summer

In a more positive development, U.S. businesses brought home a record amount of profits from overseas last year, since the lower U.S. tax rates let them keep more of it. But businesses are not investing that money the way tax-cut promoters said they would. There was a modest increase in business investment in 2018, but it was lower than the increase in 2012 and 2014. And investment has tapered off this year, with companies worried about a global economic slowdown and the damaging effects of Trump’s protectionist trade policies.

[Check out the Yahoo Finance Trumponomics Report Card.]

Companies did splurge on share buybacks last year, however—which is not something supporters of the tax cut are eager to promote. There’s nothing inherently wrong with buybacks, but when a company devotes cash to repurchasing shares, that’s normally because it doesn’t see investments in people, equipment or facilities that would generate a better return. And buybacks don’t help workers or do much to stimulate growth.

Investors typically hope for a calm summer, but they may not get it this year. The U.S. standoff with Iran grew hot after Iran shot down a U.S. drone on June 19. Trump apparently ordered, then canceled, a bombing mission against Iran as retaliation. There could still be a U.S. attack, an Iranian counterattack and a whole matrix of ways hostilities could metastasize.

The China trade war could get worse, as well. For now, markets seem content to believe there will be some rapprochement when Trump meets President Xi of China at the end of the month in Japan. But the two sides may have gotten as far as they can in negotiations without one side or the other making large concessions each is unwilling to make. Many analysts think more tariffs are coming, as both sides dig in their heels. Trump’s now battling a trade war in one part of the world and a shooting war in another.