Bloomberg Businessweek

 ECONOMICS Bloomberg Businessweek March 11, 2019

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THE BOTTOM LINE The popularity of Mexico’s president has only

increased during his first 100 days in office. But economists have

been downgrading the country’s growth forecasts.

A Lot of Huff for

ALittlePuff

The Tax Cuts and Jobs Act of 2017 was as close as

the real world gets to a laboratory experiment on

whether supply-side theory works in practice. More

than one year on, we have an answer. It’s “meh.”

The White House and congressional Republicans

argued that easing the corporate tax burden would

lift business investment out of the doldrums and

reinvigorate the U.S. expansion. An analysis by

Bloomberg Economics shows that while investment

spending did pick up in 2018, the amount attribut-

able to a lighter corporate tax burden is small. It’s

not that tax cuts don’t matter. It’s that they don’t

matter much. That view is informed by looking at

a longer sweep of history, which makes clear that

despite its size, the TCJA was always destined to fall

short of the hype.

Supply-siders argue that the tax code is a sig-

nificant factor in corporations’ capital-spending

plans. The central premise is simple and intuitive:

Allowing businesses to hold on to a bigger share of

their profits motivates them to increase investment.

Demand-side enthusiasts, on the other hand, argue

that such decisions are driven more by the state of

the economy and that businesses will invest when

existing factories, storefronts, equipment, etc., are

insufficient to meet demand for their products. In

their conception, changes to tax law are of second-

ary importance.

○ The Trump tax cuts did boost corporate

investment in 2018—but not by much

Still, both sides would agree that the U.S.’s latest

attempt at tax reform was a boon to corporate prof-

its. The reduction in the top marginal tax rate for

corporations, from 35 percent to 21 percent, helped

boost profits almost 8 percent in the first three quar-

ters of 2018 from the same period a year earlier. If

the pace carried into the fourth quarter (we won’t

know until data are released later this month), that

would be the fastest pace of profit growth since 2012.

partners have a majority in Congress and most

state legislatures. In recent months, AMLO has

launched attacks on autonomous government

agencies, accusing them of being biased in favor

of business, and called the Supreme Court dis-

honest. “In Mexico, presidents have a very strong

influence,” says Javier Oliva, a political scientist at

Mexico’s National Autonomous University. “But for

our democracy to work, we need more checks and

balances, and the president is neutralizing them.”

AMLO has been meeting with Mexican business

leaders in an attempt to mend fences. Ramírez

de la O, who runs Ecanal, an economic advisory

firm, says he’s seen some Mexican companies

come around to AMLO’s idea of creating public-

private partnerships to build an oil refinery and

an interstate passenger train.

But Wood of the Wilson Center says busi-

nesses’ suspicions have hardly been laid to rest.

Addressing a group of 150 investors at a recent con-

ference in Miami, he asked how many felt comfort-

able putting money into Mexico now. “Two people

raised their hands,” Woods says. “If you asked that

question two years ago, everyone in the room

would’ve raised their hands.” —Nacha Cattan