Domestic demand and sales have had a bigger impact on growth in U.S. business investment than the Tax Cuts and Jobs Act of 2017, according to a study from the IMF.
The study found that while the act's corporate tax rate reduction lowered the cost of capital for businesses, companies' also have strengthened their ability to charge prices above production costs, which the IMF said "has dulled the impact of corporate tax cuts on business investment decisions," the organization said in a blog post.
Since 2017, private-sector expectations of the future demand for products have supported most of business investment growth. Increase in sales and optimism were the main factors influencing firms to raise investments.
Effects of tax changes on companies' investment seem to have reduced over the recent decades as their market power has risen, a trend that has been observed in companies ranging from airlines to pharmaceuticals to high-tech companies, the IMF said.
Enterprise-level data for 2018 compiled by IMF also supports the notion that the higher the market power of a company is, the lesser its sensitivity to tax changes is, the blog added.
"The bottom line is this: strong demand since the passage of the Tax Cuts and Jobs Act has been the principal driver behind corporate investment decisions — not the reduction in the cost of capital coming from the corporate tax cuts themselves," the IMF said.