Do tax cuts spur investments?

It is an entrenched narrative that tax cuts will lead to greater investments. This was one of the primary arguments behind the Trump tax cuts in the US. The top executives of US companies lobbied aggressively making public statements that if the cuts were made, it would boost investments.

The law cut the corporate rate to 21 percent from 35 percent, and allowed companies to deduct the full cost of new equipment investments in the year that they make them... Companies have already saved upward of $100 billion more on their taxes than analysts predicted when the law was passed. Companies that make up the S&P 500 index had an average effective tax rate of 18.1 percent in 2018, down from 25.9 percent in 2016, according to an analysis of securities filings. More than 200 of those companies saw their effective tax rates fall by 10 points or more. Nearly three dozen, including FedEx, saw their tax rates fall to zero or reported that tax authorities owed them money.

Now that the $1.5 trillion cuts have happened, what has been the outcome?

A New York Times analysis of data compiled by Capital IQ shows no statistically meaningful relationship between the size of the tax cut that companies and industries received and the investments they made. If anything, the companies that received the biggest tax cuts increased their capital investment by less, on average, than companies that got smaller cuts... 

From the first quarter of 2018, when the law fully took effect, companies have spent nearly three times as much on additional dividends and stock buybacks, which boost a company’s stock price and market value, than on increased investment... Those cuts stimulated the American economy in 2018, helping to push economic growth to 2.5 percent for the year and fueling a boost in hiring. Business investment rose at an 8.8 percent rate in the first quarter of 2018, and was nearly as strong in the second quarter. But the impact dwindled quickly. In the summer, the economy grew at just 1.9 percent and business investment fell 3 percent, including a 15.3 percent plunge in spending on factories and offices. Over the spring, companies spent less on new investments, after adjusting for inflation, than they had in the winter.

The Times article writes about FedEx, one of the more vocal lobbyists for tax cuts,

FedEx’s financial filings show that the law has so far saved it at least $1.6 billion. Its financial filings show it owed no taxes in the 2018 fiscal year overall. Company officials said FedEx paid $2 billion in total federal income taxes over the past 10 years. As for capital investments, the company spent less in the 2018 fiscal year than it had projected in December 2017, before the tax law passed. It spent even less in 2019. Much of its savings have gone to reward shareholders: FedEx spent more than $2 billion on stock buybacks and dividend increases in the 2019 fiscal year, up from $1.6 billion in 2018, and more than double the amount the company spent on buybacks and dividends in fiscal year 2017... FedEx spent $10 million on lobbying in 2017, in line with previous spending, with much of it focused on tax issues, according tofederal records. Its team pushed hard to shape the bill behind the scenes, meeting regularly with House and Senate committee staff who were writing the provisions.