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Assessing the Bureau of Economic Analysis 2018 Q1 GDP Estimate

Tax Policy – Assessing the Bureau of Economic Analysis 2018 Q1 GDP Estimate

Friday, the Bureau of Economic Analysis (BEA) released its first quarter estimates of the major components of GDP. This the first full quarter of data released since the passage of the Tax Cuts and Jobs Act. However, these estimates are still what BEA calls “advanced” estimates (BEA will release its full estimates later next month) and one quarter of data is probably not enough to make any strong conclusions about the impact of any given policy.

According to BEA, first quarter real GDP rose by 2.3 percent (annualized rate), which was slightly slower than real GDP growth in quarter 4 of 2017 (2.9 percent). However, GDP in quarter 1 of 2018 grew by 2.9 percent over quarter 1 of 2017 last year. This is an acceleration of the U.S. economy. Quarter 4 of 2017 grew 2.6 over quarter 4 of 2016, while quarter 1 of 2017 grew 2 percent over quarter 1 of 2016.

Can we say anything about the Tax Cuts and Jobs Act (TCJA) with this data? One place where the TCJA would likely show up is in fixed investment, especially that of equipment and structures. The TCJA reduced the corporate tax rate and sped cost recovery for these assets. According to BEA, fixed investment in equipment grew by 4.7 percent (annualized) in quarter 1, which is slower than the previous period, which saw annualized growth of 11.6 percent. Nonresidential structures grew at an annualized rate of 12.3 percent in quarter 1, which is nearly twice as fast as the previous period (6.3 percent in quarter 4 of 2017).

However, as Greg Ip of The Wall Street Journal mentioned, we don’t know to what extent this is timing. Companies may have pulled many planned investments forward into quarter 4 of 2017 from quarter 1 of 2018, which would have the effect of reducing investment growth in quarter 1 of 2018.

It is also worth mentioning that investment in nonresidential structures ticked up very slightly over the last quarter (about 0.1 percent of GDP) and investment in equipment remained steady as a share of GDP.

While the data in this first full quarter since passage of the TCJA shows some positive trends in GDP, it shows a slight reduction in the growth of investment, possibly due to timing. As we get more data over time, we will be able to make stronger observations about the economy after the passage of the tax law. But we should always be careful of making too strong conclusions as we can never observe the counterfactual, or the economy in which the tax law never passed.

Source: Tax Policy – Assessing the Bureau of Economic Analysis 2018 Q1 GDP Estimate

Business Investment Increases by 39 Percent in Q1 2018

Tax Policy – Business Investment Increases by 39 Percent in Q1 2018

Business investment in the United States is on the rise. Bloomberg Markets reports that among the 130 S&P 500 companies that have reported results for the first quarter of 2018, capital spending increased by 39 percent—the fastest growth in seven years.

An increase in how much businesses are investing is good news, as business investment is a determinant of the long-term size of the economy. Increased capital expenditures can increase the size of the stock of capital, such as plants, machinery, and equipment. In the long run, a larger capital stock leads to higher levels of productivity, employment, output, and incomes.

Bloomberg markets also reported that net buybacks (16 percent) and dividends (11 percent) rose, but not by as much as capital spending (39 percent).

It is not yet clear that this data is related to the TCJA, but these changes are all things one would expect. The TCJA reduced the corporate tax rate from 35 percent to 21 percent. As we have written before, a corporate tax cut will have two effects, one short-term and one long-term. Companies will receive a windfall to the cut on existing investment that they can return to shareholders through increased dividends and buybacks. But at the same time, companies face a lower tax burden for new investments, which encourages more capital spending that eventually translates into higher productivity and wage growth.

Graph retrieved from

The most significant pro-growth provisions of the Tax Cuts and Jobs Act are the corporate rate reduction to 21 percent and 100 percent bonus depreciation of short-lived assets, both of which should encourage increased capital formation. While it is too soon to tell whether this increase in investment is due to the new tax law, it is a positive development for our economic outlook.

Source: Tax Policy – Business Investment Increases by 39 Percent in Q1 2018

Missouri Corporate Tax Reform Bill Receives Bipartisan Support, But Prospects Uncertain

Tax Policy – Missouri Corporate Tax Reform Bill Receives Bipartisan Support, But Prospects Uncertain

It’s not often that a tax reform package posts such impressive support, but in Missouri, Senate Bill 674 sailed out of the upper chamber on a bipartisan vote of 28-4. The bill lowers the corporate income tax rate to a highly competitive 3.5 percent—that would be the second-lowest corporate income tax rate in the country—paid for by tax simplification measures that eliminate companies’ ability to choose the method of tax apportionment most favorable to them.

For all its support, however, the legislation may yet fall victim to a larger tax battle waging between the House and Senate.

Both chambers have advanced their own comprehensive tax reform proposals, which combine cuts to both corporate and individual income tax rates with base-broadening “pay-fors.” Both bills (Senate Bill 617 and House Bill 2540) have much to commend them, but they also represent distinct approaches and reflect the different priorities of each chamber.

With only about a month to go in session, the chances of a compromise are dwindling. There may be too many sticking points: taxes versus fees, target rates and revenues, utilization of triggers, the possible inclusion of a so-called “throwback” rule as a revenue-raiser, and more.

These are conversations worth having. Both bills have flaws, but they also identify many of the key shortcomings of the state’s current tax code. There’s a real opportunity for comprehensive tax reform, this year or next.

But SB 674 needn’t be seen as competing with these ideas, and it would be unfortunate if a proposal with such broad support were held up due to a broader, yet largely separate, debate. There are indications that the House might amend SB 674 to include many or all of the House’s tax reform priorities, a move which could leave all tax legislation still languishing when the session adjourns.

Legislators could, however, move forward on SB 674 independently while continuing to work toward a broader agreement on tax reform, whether that happens this year or next. If comprehensive tax reform happens in 2018, so much the better. If not, passage of SB 674 would give legislators something to build on, while improving the state’s appeal with a notably competitive corporate income tax rate—achieved on a revenue-neutral basis, with adjustments taking place fully within the corporate code.

We’ve written previously about the pending comprehensive tax plans, and about the changes contemplated in SB 674.

With a bill that enjoys this much support from members of both parties, there’s no reason that Missouri legislators shouldn’t be able to walk away from the 2018 session with a win on tax reform.

Source: Tax Policy – Missouri Corporate Tax Reform Bill Receives Bipartisan Support, But Prospects Uncertain

New IRS Data Shows Most IRA Contributions Were Made by Middle-Class Taxpayers

Tax Policy – New IRS Data Shows Most IRA Contributions Were Made by Middle-Class Taxpayers

New data released this week from the Internal Revenue Service on Individual Retirement Accounts (IRAs) most notably includes who contributed to IRAs and how much for tax year 2015. Taxpayers contributed nearly $40 billion to IRAs in 2015, indicating that tax-neutral savings accounts will continue to be an important source of capital income. Expanding and simplifying their structure would broadly benefit many Americans.

Americans can generally choose to save for retirement using either a traditional-style account or a Roth-style account. In traditional-style, or tax-deferred, accounts, the initial savings are not subject to income tax and the returns are subject to tax when they are later withdrawn. In Roth-style accounts, the initial savings are subject to income tax and the account grows tax-free. While the distinction of how these accounts are taxed is relatively straightforward, the restrictions and rules applying to different types of accounts create much complexity for those wishing to save.

Previously released IRS data had shown that in 2015, pension and retirement account distributions were an important source of capital income for the middle class. The contributions made by taxpayers in 2015 indicate that both traditional and Roth IRAs continue to be a largely middle-class phenomenon.

In tax year 2015, taxpayers contributed a total of $17.7 billion to traditional IRAs and $21.7 billion to Roth IRAs. These amounts do not include contributions to 401(k)s, so they do not represent all retirement saving. In 2015, the adjusted gross income (AGI) phaseout range for making contributions to Roth IRAs was $183,000 to $193,000 for married couples filing jointly, meaning that if their AGI was above these limits they generally could not contribute to Roth IRAs. The contribution limit to IRAs in 2015 was $5,500.

Nearly 48 percent of IRA contributions to either style of account were made by households making under $100,000 per year, representing 55 percent of the number of households that made IRA contributions. If we consider households making between $100,000 and $200,000 middle class, then these shares rise to nearly 84 percent and 88 percent, respectively.

Source: Tax Policy – New IRS Data Shows Most IRA Contributions Were Made by Middle-Class Taxpayers