The Data Do Not Support Supply-Side Economics

New Federal Reserve data show that 2017 tax cuts benefited shareholders but did not boost investment.

Copies of the conference report for the Tax Cuts and Jobs Act sit on the dais of the U.S. House Committee on Rules in Washington, D.C., December 18, 2017. (Getty/Chip Somodevilla)
Copies of the conference report for the Tax Cuts and Jobs Act sit on the dais of the U.S. House Committee on Rules in Washington, D.C., December 18, 2017. (Getty/Chip Somodevilla)

In 2017, Congress passed the Tax Cuts and Jobs Act, a move that amounted to a massive giveaway to all U.S. corporations with profits. Supporters of the tax cuts, including President Donald Trump, promoted the bill using the underlying logic of basic supply-side economics. Corporations would get more cash from lower tax rates and, more importantly, from incentives to bring money they had parked overseas back to the United States—a move that would reduce their taxes. This additional money would then flow into new investments in manufacturing plants, office buildings, and equipment such as computers and trucks.

According to supply-side logic, the new investments would ultimately translate into more jobs and higher pay for U.S. workers. Specifically, the Trump administration argued that the money washing back ashore from overseas investments would be especially helpful in boosting investments, productivity, jobs, and pay.

On June 7, the Federal Reserve released its latest data on corporate finances, providing the first look at what happened after the passage of the tax cuts.* The supply-side arguments do not hold up; corporations have gotten a lot more money, but that additional cash has not translated into increased domestic investments.

Breaking down the Federal Reserve data

Corporate cash inflows increased in two ways: One, they provided less than ever before in taxes relative to their profits; and, two, they brought a significant amount of money back from overseas. The share of taxes out of profits fell to 13.8 percent, down from an already very low 21.5 percent at the end of 2017. This should have given corporations a lot of extra money to invest in things like office buildings, manufacturing plants, heavy machinery, and trucks—$23 billion to be exact. Even more noteworthy, nonfinancial corporations used an additional $274 billion from overseas to pay dividends to their shareholders. This should have freed up an equal amount of money to invest from domestic resources.

However, the data show that investments took a back seat in the first quarter of 2018. Capital expenditures equaled 178.6 percent of after-tax profits in that period, meaning that companies borrowed money to invest. This was down from 191.2 percent at the end of 2007. If, in the first quarter of 2018, corporations had invested the same amount relative to after-tax profits as they did at the end of 2017, they would have had an additional $58 billion to spend on manufacturing plants, office buildings, and equipment such as computers, heavy machinery, and trucks.

Yet, rather than investing the money in this way, corporations used it to keep shareholders happy. In the first quarter of 2018, the share of after-tax profits that went to net equity issues—share repurchases above and beyond new share issuances—equaled 37.5 percent, up from 32.7 percent at the end of 2017. This acceleration indicates that corporations spent an additional $12 billion in the first quarter of 2018, for a total of $257 billion, in order to buy back their own stocks. Such a buyback raises the prices of a company’s shares and boosts the wealth of its shareholders.

Corporations also used the additional funds gained from lower taxes and additional overseas money to further build up their cash reserves. In the first quarter of 2018, total corporate cash amounted to $2.7 trillion, or 6 percent, of all corporate assets. This is the highest level of inflation-adjusted cash holdings on record, dating back to 1952.


Corporations continue to be awash in money; the 2017 tax cuts just made it a lot easier for them to get that money. Yet the cash is not benefiting the economy in the form of increased investments. It is therefore unlikely that the gains promised by supporters of supply-side economics will trickle down to workers.

Christian E. Weller is a senior fellow at the Center for American Progress and a professor of public policy at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts, Boston.

*Author’s note on underlying calculations: This column uses several calculations, such as the ratio of corporate taxes to corporate profits and the inflation adjustments of liquid holdings. In some instances, the calculations create a counterfactual, such as what taxes would have been if the ratio of taxes to profits had remained the same as in the previous quarter. For instance, this calculation multiplies the difference between the ratio of taxes to profits in the first quarter of 2018 and the last quarter of 2017 by the total amount of profits in the first quarter of 2018. Finally, the text refers to inflation-adjusted cash holdings, whereby the deflator is set equal to 100 for the first quarter of 2018. All calculations, except for inflation-adjusted cash holdings, are based on data for nonfinancial corporations in the Federal Reserve’s Z.1 release, “Financial Accounts of the United States,” from June 7, 2018. Total assets are from Table B.103; financial assets, such as liquid holdings (cash), are from Table L.103; and financial flows, such as profits, taxes, dividends, net equity issues, and capital expenditures (investments), are from Table F.103. Liquid holdings are deflated by the price index for nonresidential fixed investments from the Bureau of Economic Analysis’ National Income and Product Accounts. This price index is reindexed so that it is set equal to 100 for the first quarter of 2018.

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Christian E. Weller

Senior Fellow

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