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Federal corporate tax revenues have fallen about 30 percent on a year-over-year basis since the tax rate w as lowered from 35% to 21% in January.

A lower tax rate increases the return on investment and should provide an incentive to investment. That was the rationale for the recent tax cut. Business investment increased some after the cut but has barely increased (1% not annualized) in the most recent quarter. But here is the thing, businesses won’t make investments if they don’t see profitable opportunities. There are likely to be fewer opportunities for profitable investment as the economic expansion ages. So while a corporate tax cut was needed, the stimulus value of a large tax cut late in the business cycle was questionable.

Enacting some smaller cut, helping the government avoid depleting its coffers during a period of solid economic growth, and saving any additional cuts for a time when the economy is weaker, would have been a better path. For the same reason that very low interest rates in a strong economy limit the ability of the Federal Reserve to stimulate the economy as growth weakens, so too does a large corporate tax cut in an economy with near full employment and with solid economic growth.

This entry was posted on December 21, 2018 at 3:57 pm and is filed under Fiscal Policy, Tax Revenue, Uncategorized. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Business Investment