The unemployment rate is at historic lows, which would typically lead to strong wage growth. After all, the healthy labor market makes it harder to retain talent and many businesses are compelled to pay a more attractive wage. Yet a recent report shows that annual wage growth has actually dropped to 2.47%.
So if business owners aren’t investing in employee wages, where is the money going? More specifically, how are they spending the money they retained thanks to this year’s federal tax cuts?
A new Bank of America study shines some light on the situation. Of the small business owners surveyed, 71% said they expected to save money this year due to tax reform. Of those folks, about 37% planned to invest the savings in their business, while 21% said it’d go to their employees in the form of pay increases and bonuses. Other popular purposes for the money included hiring new workers, expanding operations, and making capital improvements.
“Tax reform has been described as a game-changer,” Sharon Miller, head of small business for Bank of America, told USA Today. “They’re investing back in their businesses and you can see it.”
The survey highlighted quite a bit of optimism from our nation’s small businesses. Indeed, 56% of business owners said they believe their local economy will improve over the next 12 months. And 54% felt the national economy will improve over that same period of time. These stats are notable, as they’re the highest they’ve been since 2015.
At the heart of many business owners’ optimism are the tax cuts. For those who report their business profits as income on their individual returns, it’s incredibly helpful that the top tax rate decreased from 39.6% to 37%. Other new benefits include the fact that such businesses can write off 20% of their income and enjoy an increase in the amount of capital outlays that can be deducted from taxable income.
Of course, there are also some legitimate concerns on the horizon. The Bank of America survey revealed that 75% of small business owners are concerned about health care costs. That’s a sharp increase from the 64% who reported similar feelings last year. Other worries include the upward trend of interest rates and gasoline prices.
Despite these issues, the economy looks strong and the tax savings are being felt by most small businesses. It’s possible, however, that the pressure of rising costs associated with things like health care, interest rates, and gasoline has prompted many business owners to invest directly into their business and operations instead of boosting their employees’ wages.