Has corporate America failed to make good on its promise to increase investment after getting a huge tax cut in 2018? That’s the premise of an article that so outraged FedEx Corp. CEO Fred Smith that he has challenged the editor of the New York Times, where it was published, to a debate over it.

The best way to judge the effect of 2017’s Tax Cut and Jobs Act is to compare what has happened since to what would have happened if it hadn’t been passed. This is by nature a speculative exercise, but several lines of evidence suggest that the cuts are working as intended, even as other factors are slowing investment growth.

The case that the tax cuts are not having their intended effect comes in two parts. First, investment growth was higher before the tax cuts than afterward. Second, there is no correlation between the companies that received the largest tax cuts and those that have increased investment the most. Those assertions, while true, miss the point.

The implicit model here is that the tax cuts would fund greater investment by leaving corporations with more cash on hand. But that isn’t the primary way that tax cuts are supposed to influence investment, and none of the models that predicted a larger economy as a result of the tax cuts was based on such effects.

The idea, rather, is that the tax cuts stimulate investment through related channels — by making it easier for companies to recover costs associated with new investment, and by increasing the market value of business capital.

Both effects raise Tobin’s Q, the economics of which are complex but can be summarized this way: As the market value of assets rises relative to the cost of replacing those assets, investment increases. So soaring tech stock prices in the 1990s led to an enormous investment in Silicon Valley startups, while a run-up in home prices in the early 2000s led to record construction of single-family homes.

In both of these cases, the boom was based on bubble-driven price increases. The goal of tax reform was to create a more sustainable increase in asset prices by cutting business taxes. It did exactly that.

But as business investment was climbing through 2018, there was something else happening: President Donald Trump was continuing to ramp up his trade war. By the end of the year, the effect had begun to hit stock prices, which fell in the fourth quarter. Business investment likewise peaked in the first quarter of 2019 and has declined since. The evidence strongly suggests that both the tax cuts and the trade war have had their predicted effect on business investment — the first positive, the second negative.

Comparisons with the Congressional Budget Office forecasts bear that out. In 2017, before the tax cuts passed, the office predicted that growth in business investment would accelerate to nearly 6% by the end of the year before slowly declining to 2% by the third quarter of 2019. Instead, business investment has been more volatile, though it remains above what the original CBO projections.

Economists, finance ministers and business leaders all blame the trade war for worsening investment conditions. And there is ample indication that an end to trade conflicts would allow business investment to return to the higher trajectory of 2017 and 2018.

In his statement about the Times article, Fred Smith called for a debate about “federal tax policy and the relative societal benefits of business investments.” He might want expand the discussion to include U.S. trade policy as well.

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