How quickly will the new tax law affect the economy?
The White House would love for the tax bill President Donald Trump signed into law in December to start affecting taxpayers and the economy at large as soon as possible.
The day after his State of the Union address, Trump brought business people to the White House to discuss for the television cameras how they have already been impacted by the tax law.
"These are people who have worked hard, they have businesses," Trump said. "In some cases, they're making tremendous percentage amounts more than they were going to before the plan."
Several of the guests explained that their companies had made investments or given their workers bonuses because of the tax law.
But can the tax law really have had a large scale impact on the economy? Or could impacts be on tap shortly?
When we checked a range of economists, they generally agreed that some limited impacts could start soon. However, they also agreed that firm conclusions would emerge only well into the future, and even then, a cause-and-effect relationship would be tricky to confirm.
In what ways could the economy see a quick impact?
The strongest route for a quick economic impact might come from businesses, economists said.
"To the extent that businesses began expecting the tax bill to pass before it passed, they may have started orienting their business decisions based on the expected bill," said Scott Greenberg, a senior analyst at the conservative-leaning Tax Foundation.
Donald M. Chance, a professor of finance at the E. J. Ourso College of Business at Louisiana State University, said the economy should be getting a boost because companies are giving out bonuses and will be repatriating money from overseas, which is allowed under the new tax law. "Everybody is reacting to this," he said.
The White House has touted a flurry of bonuses by mostly big companies -- some 3 million, according to the figure cited by Trump during his State of the Union address. We rated that figure Mostly True.
However, the announcements by businesses might be overhyped. A relatively small percentage of workers have been given bonuses, and it’s not always clear that the companies, in a tightening labor market, wouldn’t have made pay increases in the absence of the tax law, experts said. There are obvious political advantages to crediting a decision to a White House-backed policy, so it’s hard to know whether such moves would have happened anyway.
Meanwhile, "corporate bonuses are not lasting--they are one time only," said William Gale, co-director of the Urban Institute-Brookings Institution Tax Policy Center. That limits their effect.
The most obvious provision to spur business behavior would be the one that ensures 100-percent expensing for new investments, economists said. Under this part of the law, companies can deduct the cost of many investments from their tax liability immediately, rather than spread those costs over several years’ worth of tax filings, Greenberg said. That provision was made retroactive to September 2017 -- two months before the law was signed.
There could "possibly be a very modest uptick in consumption, some due to changes in withholding and others as a result of the ‘wealth effect’ from the stock market run-up," said Dean Baker, co-founder of the liberal-leaning Center for Economic and Policy Research. "At least part of the rise in stock market since the fall is due to the tax cut."
However, taxpayers may be more risk-averse than businesses, said Benjamin R. Page, a senior fellow at the centrist Urban Institute-Brookings Institution Tax Policy Center.
"Some taxpayers may start spending money even before the paycheck, but that’s the minority of people," Page said.
Should we be skeptical?
In any case, the economists we checked with expressed a degree of skepticism that the tax law will have a quick impact -- and especially one that can be independently measured.
"The law passed too recently to have a noticeable effect on employment, though it’s probably contributing to bullish sentiment on Wall Street," said Gary Burtless, a senior fellow at the Brookings Institution. "The effect on U.S. employment, if any, will be gradually visible over next five to 10 years."
Economist and New York Times columnist Paul Krugman agreed with the notion of a longer time frame.
"Even positive projections from the tax law depend on a chain of events: lower corporate taxes leading to higher business investment, leading to a larger capital stock, leading to higher wages," he said. "This would take time, in fact a number of years. Even the first step, a rise in business investment, would take months to happen -- corporations can't conjure up new investment plans the day after a bill is passed, let alone get construction and all that started. So even the logic of optimists says we shouldn't be feeling positive effects yet."
Separate from the question of when the tax law will have an impact is whether, or how soon, data will exist to document it.
"Even if any real economic activity were being created by the tax bill, there is no way that we would have the data to prove it" in short order, said Neil Buchanan, law professor at George Washington University.
And even if documentation of economic improvements eventually materializes, it won’t necessarily be clear that the tax law was the primary cause of the change.
"It’s extremely hard to tell, after the fact, the effects of policy, no matter how long you wait," Page said.
While the Tax Foundation’s Greenberg cited possible pathways for the tax law to impact the economy quickly, he acknowledged that he’s "trying to be charitable. It’s not entirely clear to me which effects are likely to be large and whether the timing would be consistent with the narrative that we’re already seeing (impacts)."
Greenberg added, "Virtually all serious economists expect the impact will not be felt immediately. Economic data is produced on a lag. And it will be difficult to prove that gains were linked to the tax bill. We won’t get to that level of specificity until years from now."