With unemployment on a downward trend, even before the tax law, wages are bound to go up anyway as the market tightens, independent of the tax changes, many say.
But as economists wait for the evidence to come in, other things in the economy will inevitably muddle the effects of the tax law.
While both the tax cut and spending hike will "meaningfully support GDP this year and next," JPMorgan said, "the effect of the [Bipartisan Budget Act] is likely to be somewhat greater than that of the TCJA.
Republicans facing a tough midterm election season are pointing to the strong economy as proof their new tax law is working its magic.
But as campaign ads tout swelling payrolls and lawmakers spotlight companies handing out employee bonuses, there’s little evidence the tax cuts are already having an impact across the economy, which was already humming even before the law was enacted.
Unemployment, which dropped to 3.9 percent in April, has been declining for years, falling to 4.1 percent before the tax cuts were approved.
The billions in bonuses being handed out are tiny compared to the trillions of dollars in overall wages that Americans workers earn – and with the tight labor market, they might have been handed out anyway.
Meanwhile, the Treasury Department hasn’t even finished writing the new rules spelling out how exactly the new law will work. And the pace of change in business investment and labor supply is typically very slow.
"It’s just way too early to see any kind of evidence of faster growth, faster investment, more labor supply – any of that stuff," said Joel Prakken, chief economist at Macroeconomic Advisers by IHS Markit, a prominent economic forecasting firm. "Anybody who thought that, within a quarter or two, there would be a big uptick in growth is deluding themselves."
That hasn’t stopped the GOP from claiming credit. The economic dividends of the new law are central to their midterm plans, and they are anxious to talk up their biggest legislative accomplishment of the Trump administration.
In one Nebraska district, the Chamber of Commerce is running an ad backing Republican incumbent Don Bacon that says: “We’re adding jobs, and Nebraska businesses are giving bonuses again.” It warns that Democrats want to repeal the law’s tax cuts.
Republicans have been urging companies to forward them stories of the law helping their businesses, which they are eagerly sharing with voters. Labor Secretary Alex Acosta suggested earlier this month at a roundtable with business leaders in Cleveland the Tax Cuts and Jobs Act has already generated 800,000 new jobs.
Meanwhile, House Ways and Means Chairman Kevin Brady (R–Texas), one of the plan’s architects, points to a marine construction company in his district he says is boosting pay, ordering a new barge and buying "the largest crane in Texas."
"We are just now four months into the new tax code – we’re not just in the first inning, we’re in the first batter of the first inning of tax reform, and already the results are very encouraging on investment, on wage growth, on dollars coming back from overseas," Brady said last week.
But in truth, economists say, it will be months, if not longer, before the effects begin to really show up in the economic data. And even then, many say, the evidence will be more ambiguous than lawmakers suggest.
That’s because the economy was already strong before the law passed, so some of the good news would have happened even if the Tax Cuts and Jobs Act was never approved.
They also see the economy getting a boost from a completely separate and largely overlooked law Congress recently OK’d: A nearly $400 billion spending increase opposed by many Republicans that some experts say will do more for growth, at least in the short term, than the tax cuts.
People who monitor economic indicators say the changes have barely begun to register.
"So far, we have not seen any meaningful effects of the stimulus on economic activity," JPMorgan said in a research note earlier this month.
Even conservative economists are waving off the bonuses touted by lawmakers as a poor gauge of the law’s impact.
"I assume those things are bonuses that [companies] would have done because of the tighter labor market that now exists anyway that they are now attributing to the tax cut for PR reasons or to curry favor with the president," said Alan Viard, an American Enterprise Institute economist.
Official data shows the bonuses are dwarfed by total wages paid. Bonuses totaled $2.5 billion in the first quarter of this year, according to the federal government’s Bureau of Economic Analysis. More than $8 trillion was paid in salaries and wages during that period.
Kyle Pomerleau, an economist at the Tax Foundation, sees more hopeful signs in the BEA’s recent analysis of investment in equipment and structures, which shows an uptick in investment in the fourth quarter of last year and the first quarter of this year. The law offered more generous investment write-offs retroactive to September, 2017.
"That was companies reacting to the tax law, to some degree," Pomerleau said.
It will take a while to get more definitive data in part because the tax cuts for individuals are being doled out piecemeal in the form of bigger paychecks, and withholding did not even begin to change until February.
As for businesses, they tend to develop and implement investment plans slowly. Many companies, particularly multinationals, don’t even know how exactly the new law affects them because the Treasury Department is still writing regulations detailing things like the law’s entirely new international tax regime.
"I expect we’ll see a temporary bump to growth later this year and into next year – I’d be surprised if we don’t," said Mark Zandi, chief economist at Moody’s Analytics. "We should see consumer spending, retail sales, vehicle sales – we should see all that pick up."
"There should be a bounce to investment – durable goods should pick up, and that should begin translating into more job growth and GDP growth," Zandi said.
His firm sees the law’s economic effects peaking next year, which is a bit sooner than other major analyses.
Goldman Sachs sees the benefits of the law unfolding over several years, before they begin to top out in 2020, as does the International Monetary Fund. Prakken’s group says the law will have its biggest effects beginning in 2021, while the Congressional Budget Office sees it maxing out in 2022.
Economists say they will have a hard time proving the law is having the predicted effects because it will be challenging to separate the law’s benefits from what would have happened anyway.
With unemployment on a downward trend, even before the tax law, wages are bound to go up anyway as the market tightens, independent of the tax changes, many say.
"It’s difficult to look at economic data that we observe and say, ‘This is the tax law, definitely," said Pomerleau. "We just don’t know what the alternative universe looks like in which the tax law wasn’t passed."
He wants a year or two of data before trying to figure out the law’s effects.
But as economists wait for the evidence to come in, other things in the economy will inevitably muddle the effects of the tax law.
That’s already happening, many say, with the recent spending agreement, in which lawmakers agreed to increase funding by almost $400 billion over the next two years for the Pentagon, an array of domestic programs and for disaster relief.
While both the tax cut and spending hike will "meaningfully support GDP this year and next," JPMorgan said, "the effect of the [Bipartisan Budget Act] is likely to be somewhat greater than that of the TCJA."
It’s hardly the first time experts have been unsure about the effect of a tax cut. Economists still debate the impact of changes made years ago, said Viard.
"The effects of all of these initiatives are subtle," he said. "People are still arguing over what were the effects of the 2001 tax cut or of the 2009 stimulus package. We have some idea, based on statistical evidence, but we don’t have a conclusive idea – and we certainly didn’t develop a conclusive idea within a few months."
With elections looming in November, the GOP doesn’t have that long to wait.
"We are seeing the incredible results as a result of our massive tax cuts, and everybody is benefiting," President Donald Trump told the National Rifle Association this month.
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