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Did tax law produce virtually no new business investment, as Joe Biden said?
Former Vice President Joe Biden — a possible 2020 presidential contender — criticized the Republican tax law signed by President Donald Trump.
Biden suggested that the law did not have a big enough impact on the economy to justify its costs, which include a reduction in federal revenues by $1.5 trillion over 10 years.
"You saw what happened, all the news about the massive tax cut," Biden said at an event at the Broward Center for Performing Arts in Fort Lauderdale, Fla. "There was virtually no new business investment." Biden indicated that he had predicted that companies would follow this course, and he added, "The bulk was used to buy back their own stock."
We decided to take a look at both parts of Biden’s statement.
Economists say the amount of business investment hasn't skyrocketed, but they added that Biden was leaving out some important context.
Biden’s office pointed us to a Wall Street Journal news article published Dec. 22, 2018. The article cited only "modest" investment after the tax law was passed.
Biden’s remark "is a little bit misleading in the sense that it creates an impression that investments have not grown in businesses over the last year to year and a half," said Charles C.Y. Wang, an associate professor at Harvard Business School. "In fact, the data shows that business investment has grown rapidly from the fourth quarter of 2017 to the third quarter of 2018."
Indeed, a National Association for Business Economics survey published in January 2019 found that the the tax law had an impact on the goods-producing sector. Half of survey respondents in this sector reported increased investments at their companies.
And a monthly survey of small businesses by the National Federation of Independent Business found that over the course of 2018, the percent of companies making a capital expenditure was higher in 2018 than in the same month in 2017 in seven months, and lower in only two.
That said, there are signs that the overall increase has been low.
The quarterly poll by the National Association for Business Economics found that 84 percent of firms surveyed said the tax law had not changed their hiring or investment plans. That was similar to the 81 percent in the previous survey, released in October 2018.
And Dean Baker, co-founder of the liberal Center for Economic and Policy Research, said it's hard to disentangle the impact of the energy markets on this investment from the impact of the tax law.
This view receives some support from a paper by Harvard University economist Jason Furman, who chaired the Council of Economic Advisers under President Barack Obama.
"Overall, business fixed investment has grown much faster in the first three quarters of 2018 than it did in previous years … but much of this is due to the 22.8 percent annual rate increase in oil and mining equipment and structures," Furman wrote. "Excluding these, investment picked up meaningfully but by a more modest amount."
There’s another important caveat: Not all investment will come immediately.
"Just like when we had our last stimulus package and it was a surprise to some that there are really very few ‘shovel ready’ government projects, most businesses were not just sitting around unable to invest because they had no capital," said Jeff Hoopes, an accounting professor at the University of North Carolina’s Kenan-Flagler Business School. "In the past five years, the cost of capital was extremely low, and many businesses who wanted to expand or invest would have been able to do so by borrowing if they wanted. I would expect the investment effect of tax reform to happen over much longer time periods than over the few months most people are examining."
Here, too, there's some hard data that stock buybacks have increased, but the assertion glosses over some nuances.
Stock buybacks refer to a practice of companies buying back shares from shareholders. The company will pay fair market value to the shareholders, essentially becoming a way to distribute cash to shareholders.
Biden’s office pointed to news coverage of 2018 setting a record for the volume of stock buybacks — upwards of $1 trillion.
But economists expressed caution about jumping to conclusions.
First, it’s important to note that $1 trillion in stock buybacks and the $1.5 trillion cost of the tax bill are apples and oranges. The tax law was projected to produce tax savings of $150 million in the first year, far less than the the $1 trillion in stock buybacks. "It is not right to treat a 10-year tax cut as though this was all money that businesses would see in 2018," Baker said.
Second, research has found that the record-setting stock buyback figure was heavily influenced by a small number of companies.
While stock buybacks did increase, a large percentage was due to a limited number of companies, led by one monster buyback, by Apple, according to the research by Hoopes and two co-authors, Joel Slemrod and Michelle Hanlon.
"We find a general increase in share repurchases following the passage of the (tax law), but the increase is extremely concentrated in a small number of firms," the researchers wrote. "We find only nine firms that announced a new share repurchase plan explicitly attributed the new plan to the" tax law.
Finally, "buybacks have been increasing for a long time," Hoopes said. "There is no discrete jump in the number of firms buying back shares because of tax reform."
Biden said, "There was virtually no new business investment" after the 2017 tax law. "The bulk was used to buy back their own stock."
Economists agree that business investment after the tax law has been underwhelming, but it was an exaggeration for Biden to say there was virtually none. Investment did increase, especially in the goods-producing sector.
As for stock buybacks, a new record was set in 2018, but research suggests that it was driven by particularly large buybacks by a small number of firms, rather than a broad swath of companies. This casts doubt on Biden’s contention that the buybacks consumed "the bulk" of the tax law’s proceeds.
We rate the statement Half True.
Joe Biden, remarks in Fort Lauderdale, Fla., Jan. 28, 2019
National Association for Business Economics, "NABE Panel Reports Less Growth in Sales, Pricing, and Profit Margins Last Quarter; Panelists Trim Expectations for Investment, Hiring, and GDP in 2019," January 2019
Jason Furman, "The 2017 Tax Law: A Boost to Growth or a Missed Opportunity?" Dec 20, 2018
National Federation of Independent Business, "NFIB Small Business Economic Trends," December 2018
Michelle Hanlon, Jeffrey L. Hoopes, Joel B. Slemrod, "Tax Reform Made Me Do It!" Nov. 29, 2018
Jared Bernstein, tweet, Jan. 28, 2019
Wall Street Journal, "One Year Later, Benefits From Corporate Tax Cut Seem Muted," Dec. 22, 2019
Reuters, "New U.S. tax cuts would worsen federal fiscal picture: CBO," June 26, 2018
CNBC, "Stock buybacks hit a record $1.1 trillion, and the year’s not over," Dec. 18 2018
CBS, "U.S. companies spent record $1 trillion buying back own stock this year," Dec. 17, 2018
Email interview with Paul A. Griffin, University of California-Davis Graduate School of Management, Jan. 30, 2019
Email interview with Jonathan R. Macey, professor of corporate law, corporate finance and decurities law at Yale University, Jan. 30, 2019
Email interview with Charles C.Y. Wang, associate professor at Harvard Business School, Jan. 30, 2019
Email interview with Dean Baker, co-founder of the Center for Economic and Policy Research, Jan. 31, 2019
Email interview with Jeff Hoopes, accounting professor at the University of North Carolina’s Kenan-Flagler Business School, Jan. 30, 2019
Email interview with Bill Russo, spokesman for Joe Biden, Jan. 30, 2019
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Did tax law produce virtually no new business investment, as Joe Biden said?
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