For a decade, the U.S. economy has plodded. Now, with a new president and a new tax plan, here’s what you can expect.
The economy will grow
Before the passage of the tax plan, economists were modestly optimistic about growth for 2018. Most seemed to be predicting growth in the two-ish percent range. Few were willing to consider growth at or beyond 3%. After all, the last time we had three percent growth, George Bush was starting his second term in the White House, Lance Armstrong was winning a Tour de France, the Cowboys and Colts were both opening brand-new football stadiums, and YouTube was going online for the first time. Gulp. It’s been a loooong time.
However, long time or not, real GDP growth north of three percent is, or was the case. Since the end of World War II up through 2005, the U.S. economy averaged growth above 3.5 percent per year. So, if three percent is the norm, why has it been so long since the economy boomed? The answer of course, lies with our overseers in Washington.
Fewer regulations means
fewer economic headwinds
Let’s start with regulations. In 2005 the economic cost of federal regulations was estimated by the Competitive Enterprise Institute to be $1.127 trillion. In 2016, it was $1.963 trillion. This is 75 percent higher and an incredible headwind for the economy. To give a comparison, corporate pretax profits were $2.138 trillion.
Many regulations are enacted by orders from the executive branch or by agencies acting on their own volition. Trump is seeking the reverse the rising tide of red tape. One executive order requires two regulatory rules to be cut for each new regulation. The president has stated that 70 percent of regulations can be eliminated. So far, he appears to be following through. The Federal Register at the end of Trump’s first fiscal year in office tallies a whopping 45,678 pages, but is less than half the size of the 2016 Federal Register, with a record 97,110 pages.
Economic growth will not solve the labor shortage most plumbers face.
All of this bodes well for the economy. America’s business community and entrepreneurs are incredibly productive and innovative. When they can direct their attention to the market instead of working around government barriers, good things happen.
Tax cuts will empower
people and companies
While Congress wasn’t paying attention of the last few decades, other nations cut corporate tax rates to gain competitive advantage. Over time, the U.S. corporate tax rates become the highest in the world when state and local taxes were factored. This led to corporate inversions where companies sought opportunities to locate in a lower tax jurisdiction. Companies with overseas earnings also chose to keep them overseas, rather than face double taxation from bringing them home. While corporate taxes are still too high, they are now about the same as the global average statutory rate.
Some corporations will pass the higher after-tax earnings on to their shareholders or use them to buy back more stock. Dividends are taxed as ordinary income and stock sales are subject to capital gains, both of which will offset reductions in federal tax revenue from the lower corporate tax rate. More importantly, this puts money in the hands of investors who will either spend it or reinvest it. Either way, the economy prospers.
Small businesses that are subject to the corporate tax will also prosper and they are more inclined to reinvest in growth. This means job creation.
While the corporate rate reductions were long overdue and a net positive, capital gains remains in place and it is far too high. Also, the populism invading the congressional action meant that the top marginal rates on personal income taxes were only slightly reduced, but a reduction is still a reduction, meaning people get to keep more of their money. Generally, people make better investment and spending decisions with their money than the government does.
Personal deductions shot up under the tax bill. This is bad news for tax preparers since fewer people will itemize. It will also impact the housing market since tax policy will not encourage home ownership as it has in the past. In addition, home equity loans are no longer deductible, which may impact renovations and remodels.
The bottom line for plumbers
Despite negative media reporting and declarations of doom from politicians, consumers seem to sense a change. Consumer spending is up. Retailers reported a good holiday season. The stock market continues to advance. The economy appears poised for a return to traditional levels of growth, which would give us the fastest growth in a decade.
Economic growth will not solve the labor shortage most plumbers face. This makes it incumbent to hire early and train often. Long term, plumbers should put apprentices in trucks and grow a labor force. Short term, it may make sense to pay more and price higher.
Plumbers in the residential new construction market should consider shifting to residential service or move into light commercial.
Matt Michel is CEO of the Service Roundtable. For help making your plumbing company more professional, join the Service Roundtable, plumbing’s largest and most affordable business alliance of growth oriented contractors. Learn more at www.ServiceRoundtable.com or call 877/262-3341.