Analysis:
- Durable goods orders have risen 11 percent, on average, since the expensing provision of the Tax Cut and Jobs Act came into effect.
- The expensing provision allows businesses to deduct the full cost of short-lived investments, similar to other business expenses.
- This has resulted in more durable goods purchases by firms, a positive indicator for the economy.
Economist Corner:
The intended effects of the Tax Cuts and Jobs Act continue to appear in the data. Durable goods represent one form of investment by businesses. The data demonstrate that durable goods orders have risen following the tax legislation.
But even the subtleties of the legislation now correspond to variation in the data. The tax bill incentivized investment through a number of channels. One channel was allowing businesses to deduct the full cost of their short-lived investments when they calculate their taxable income.
In the debate leading up to the bill’s passage, to remove disincentives for investing while the debate was still happening, lawmakers signaled their intention to have this provision apply “retroactively” to investments that businesses made in 2017 but before the legislation’s passage. Any investment made from July of 2017 on, they said, would qualify for the expensing treatment of the new legislation.
If this provision had its intended effect on investment behavior, you would therefore expect the increase in durable goods orders from the tax legislation to appear in the data starting in July of 2017. As expected, and as the chart shows, durable goods orders jumped in July 2017 – and have remained elevated ever since. If policymakers succeeded in inducing their intended effects on business behavior through the tax legislation, this is what it would look like.