Wait Before Declaring Trump’s Tax Cuts a Win

Business investment, generally speaking, is good. When companies buy things like new buildings, machines, software, vehicles or intangible assets, it helps the economy in at least four ways. First, those new capital goods require new workers to use them, so this investment tends to go along with hiring. Second, the companies that create the new capital goods get a boost. Third, having more long-lasting, productive capital goods like buildings, machines and vehicles increases a society’s overall productive power, raising wealth in the long run. And fourth, new capital goods often contain cutting-edge technology that increases productivity.

Governments use a variety of tools to push companies to invest more. Some of these tools are direct — for example governments let companies write off investments on their taxes. Some are indirect incentives that focus on trying to encourage people to buy the stocks and bonds of companies, in the hope that the companies will use that money to boost investment. This is one reason capital gains and dividends are taxed at a lower rate than ordinary income. Governments may also try to encourage investment by lowering the rate of tax on corporate profits — since capital goods are basically long-term profit-generating items, allowing companies to keep more of their profits makes capital goods more valuable.