Doubts arise on whether US corp tax cut would boost growth

Kuwait Times - - BUSINESS -

For Pres­i­dent Don­ald Trump, what’s good for Gen­eral Mo­tors is great for Amer­i­can work­ers. Same for Boe­ing. And AT&T. Not to men­tion small busi­nesses.

Trump in­sists that slash­ing the cor­po­rate tax rate from 35 per­cent to as low as 15 per­cent would free up valu­able cash. Com­pa­nies would use the money to boost in­vest­ment, in­crease em­ploy­ees’ pay, ac­cel­er­ate hir­ing and speed eco­nomic growth. What’s more, cor­po­ra­tions that now keep tril­lions over­seas to avoid US taxes would bring the money home. Amer­i­can com­pa­nies could bet­ter com­pete with ri­vals based in coun­tries with lower tax rates.

“We’re go­ing to have mag­nif­i­cent growth,” Trump de­clared aboard Air Force One on Thurs­day. “We’re go­ing to go like a rocket ship.” Would we? Many econ­o­mists, tax ex­perts and even some business own­ers say it’s un­likely. Rather than hire, com­pa­nies might use much of their tax sav­ings to buy back their stock or in­crease their div­i­dends to in­vestors. Many com­pa­nies, they note, have al­ready been able to bor­row at his­tor­i­cally low rates to ex­pand their busi­nesses yet have cho­sen not to.

“The main­stream eco­nomic ev­i­dence is that the bulk of cor­po­rate tax cuts go ex­actly to whom you would ex­pect which is wealthy in­vestors and ex­ec­u­tives,” said Chye-Ching Huang, deputy di­rec­tor of fed­eral tax pol­icy at the left-lean­ing Cen­ter on Bud­get and Pol­icy Pri­or­i­ties. Many econ­o­mists fore­see some ben­e­fits from over­haul­ing and sim­pli­fy­ing the cor­po­rate tax code, just not the ex­treme growth Trump is promis­ing. One rea­son cor­po­rate tax cuts might pro­vide lit­tle over­all ben­e­fit is the rel­a­tive health of to­day’s econ­omy. Un­em­ploy­ment is al­ready un­usu­ally low at 4.4 per­cent. The econ­omy is in the ninth year of a slow but steady ex­pan­sion, rather than in a down­turn in which tax cuts might de­liver a ma­jor boost.

In a 2014 pa­per, two econ­o­mists Alexan­der Ljungqvist of New York Univer­sity and Michael Smolyan­sky of the Fed­eral Re­serve - con­cluded that state cor­po­rate tax cuts did lit­tle to strengthen eco­nomic ac­tiv­ity un­less the cuts were made dur­ing a re­ces­sion. (The flip side is that they found cor­po­rate tax in­creases to be “uni­formly harm­ful.”)

Nor have pre­vi­ous ef­forts to re­duce cor­po­rate taxes gen­er­ally de­liv­ered as ad­ver­tised. Kansas, for ex­am­ple, ex­empted hun­dreds of thou­sands of busi­nesses from cor­po­rate taxes and cut in­di­vid­ual rates in 2012, only to face a rev­enue squeeze as the in­tended eco­nomic growth never ma­te­ri­al­ized.

The fed­eral govern­ment pro­vided a tax “hol­i­day” on over­seas prof­its in 2004 to bring money back into the United States at a dis­count to the 35 per­cent rate. But the Obama ad­min­is­tra­tion ob­served later that the move had di­min­ished tax rev­enue and un­in­ten­tion­ally led com­pa­nies to hoard cash abroad in hopes of re­ceiv­ing that dis­count. There is also con­cern that a cor­po­rate tax cut would swell the fed­eral bud­get deficit. When the non­par­ti­san Tax Pol­icy Cen­ter pub­lished an analysis this week, it found that even if vir­tu­ally all tax breaks were elim­i­nated, the cor­po­rate rate could drop only to 26 per­cent with­out in­creas­ing the deficit.

Still, many com­pa­nies stress that lower business taxes would lead to more hir­ing. John Stephens, AT&T’s chief fi­nan­cial of­fi­cer, said his com­pany faces a typ­i­cal tax rate of 34 per­cent - in­clud­ing fed­eral, state, for­eign and de­ferred taxes - in any given year. Stephens es­ti­mates that lower rates would lead the com­pany to im­me­di­ately in­vest more money in its phone net­work, which he said would lead to more hir­ing by com­pa­nies that work with AT&T.

“When we buy more equip­ment, our ven­dors hire more,” Stephens said. “When we build more ex­ten­sive net­works, we have peo­ple - hard-hat jobs - build­ing those net­works.”

The AT&T ex­ec­u­tive added that “any­thing” would be an im­prove­ment on the cur­rent cor­po­rate tax rate of 35 per­cent. But like many cor­po­ra­tions, AT&T also ben­e­fited sub­stan­tially from tax breaks be­tween 2008 and 2015, sav­ing as much as than $38 bil­lion, ac­cord­ing to an analysis by the left-lean­ing In­sti­tute on Tax­a­tion and Eco­nomic Pol­icy. The ad­min­is­tra­tion has yet to spell out all the pos­si­ble tax breaks that would be elim­i­nated to pay for lower rates.

Even if the tax rates were slashed sub­stan­tially, not all com­pa­nies would see much of a rea­son to hire more work­ers. Bill Parks, who owns NRS, an Idaho-based boat­ing gear com­pany, says the tax cuts cham­pi­oned by Trump would no longer do much to help his business.

Years ago, the lower rates would have helped him be­cause he was max­ing out his per­sonal credit cards and tak­ing a sec­ond mort­gage to fund NRS. But to­day’s bor­row­ing rates are so low that in­vest­ing in work­ers isn’t a bur­den, and tax changes would make lit­tle dif­fer­ence to his plans based on how his com­pany is struc­tured. Gary Cohn, Trump’s top eco­nomic ad­viser, has ar­gued that the planned tax cuts would help small busi­nesses. By cut­ting taxes on prof­its that typ­i­cally dou­ble as the own­ers’ per­sonal in­come, those com­pa­nies would then be able to hire more freely. This as­sumes that business own­ers want to ex­pand their pay­roll rather than just en­joy higher prof­its.

Larry Sum­mers, a Demo­cratic for­mer Trea­sury sec­re­tary, this month rat­tled off a list of rea­sons to re­porters why lower cor­po­rate tax rates wouldn’t de­liver as promised. Though US com­pa­nies do face a high rate com­pared with other coun­tries, Sum­mers said, the frac­tion of prof­its be­ing paid in fed­eral taxes is low by his­tor­i­cal stan­dards. Cor­po­rate in­come taxes col­lected last year equaled just 1.6 per­cent of the econ­omy, ac­cord­ing to govern­ment records. That com­pares with 4 per­cent dur­ing the eco­nomic boom that fol­lowed World War II, an era of growth that Trump ap­pears to want to re­vive.

Nor, in Sum­mers’ view, would ris­ing stock prices from a lower cor­po­rate tax rate shore up the pen­sions of fire­fight­ers, po­lice of­fi­cers and blue col­lar work­ers, as Cohn has ar­gued. Those few Amer­i­cans who still have tra­di­tional “de­fined ben­e­fit” pen­sions don’t re­ceive any ad­di­tional in­come if the stock mar­ket rises, Sum­mers said. “The ar­gu­ment be­ing made that the cor­po­rate tax cuts will some­how ben­e­fit work­ers is weak by the stan­dards of ‘trickle-down’ ar­gu­ments,” Sum­mers said.— AP

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