In December, Congress passed the Tax Cuts and Jobs Act, which was grudgingly signed into law by President Trump on December 22, 2017.  Upon passage a number of companies such as AT&T, Apple, Southwest Airlines, and Fifth Third Bank announced bonuses to be paid to employees ranging from $1,000 to $2,500.  Fifth Third Bank also increased its minimum wage to $15 per hour, while Wal-Mart hiked its minimum wage to $11 per hour.

The new tax law decreased the top corporate tax rate from 35% to 21%.  The U.S. had the highest corporate tax rate in the world.  However, the effective corporate tax rate was 18.6%, and overall corporate tax revenues were at around 2.2% percent of the GDP as of 2014. The Organization for Economic Cooperation and Development (OECD), a group of highly developed countries, averaged 2.8%.

Duke University’s Fuqua School of Business survey of CFOs indicated that since the tax law was enacted, capital spending would increase over the next twelve months to 11% - up from 3.2% in December.  The new tax law allows for a faster write-off of capital spending, with technology expenditures driving the spending.  A Credit Suisse survey of capital expenditures of the S&P 500 in the first quarter 2018 shows that capital spending is increasing.

The Duke University survey also showed; however, lower employment growth over the next twelve months at 3%, while showing a relatively flat increase of wages as well at 3.9%. The salary budget result, albeit a slightly higher percentage than ASE’s recent survey of 3%, reinforces that tax savings are not really, except in certain cases, or via bonuses, being reinvested into worker salaries.

The Trump administration’s Council of Economic Advisers key selling point was that such a reduction of corporate tax rates would “increase household income in the United States by, very conservatively, $4,000 annually.”  One of the issues that the U.S. has experienced in recent years, explaining the flat and consistent salary budget increase was that worker productivity was decreasing.  The theory of the tax cut was that employers would have more money to invest, thus leading to greater worker productivity and eventually increased wages.  

But this is not what is happening.  According to different reporting, the ratio of job openings to unemployed workers is almost 1:1, meaning that there is generally a job opening for every person applying.  This situation should put pressure on wages to attract workers.  However, wage growth is flat.  Further, the labor participation rate is not growing but remaining flat at approximately 62.8%.  The inability to increase workforce participation has a negative impact on the economy since increasing the GNP to 3% or higher (as the administration is pushing for) requires more workers to be engaged in the workforce.

There are several reasons for the lack of wage growth.  First, although early in the implementation of the tax law, many companies have external pressures not to increase product pricing.  Therefore, these employers cannot increase wages since their current financial structure supports healthy profits.  Shareholders are pressuring for higher returns.  Many of the largest shareholders are pension and retirement funds.  Dividend returns to these funds are tax free, unlike for the normal investor. Also, share buybacks increase the stock price.  401(k) growth should experience higher returns in 2018 with all things being equal.  

Second, the cost of borrowing is increasing.  As the Federal Reserve increases interest rates, it impacts the prime rate for corporate borrowing.  Many employers are using cash reserves to increase capital spending. Further, with more spending on technology, employers are focusing on the employment and productivity situation by investing in technology.  Higher rates also help seniors as safer investments such as CDs are experiencing higher returns.

Finally, employers may be waiting out the uncertainty of the global economic situation as trade wars may be gearing up, slowing down sales growth.  Employers may be afraid of another great recession and ensuring they have the money to survive the rainy days ahead.  ASE will continue to monitor the economic situation and hope that when the 2019 Compensation and Benefit Conference comes around we will have positive changes to report.

Source:  The Wall Street Journal 5/27/18, NPR 8/7/17, Atlanta Federal Reserve Wage Growth Tracker 5/14/18, PBS  10/30/17. New York Times 1/4/18