In theory, making it cheaper to buy new equipmentlowering the cost of capitaldrives companies to buy more. But it almost couldnt possibly be cheaper to make capital investments; companies borrowing costs have not been this low since the 1950s. Companies are even sitting on cash, declining to spend it.
From 1975 to 2000, according to the Bureau of Economic Analysis, undistributed corporate profits were stable between $100bn and $200bn. Since then, theyve climbed to $760bn. But companies arent putting this fat wad of cheap money to productive use.
Investment in new equipment recovered after the recession, but has plateaued since 2014.
People who work in financial markets have known about this problem for a while. Or, rather, theyve known that companies have been providing dividends and buying back stocks, rather than making new investments. But the news has not made it to the White House. Perhaps this will.
On April 25th economists from the University of South Carolina, Indiana University and the Treasury released the first study of a decision by the state of Kansas to eliminate its tax on pass-through income altogether. They found that small businesses shifted income to avoid taxes. And they found no meaningful consequences for investment.
