Tax plan’s promises face doubts
It’s a once-in-a-generation opportunity to fix a tax code that stifles business investment, keeps trillions in corporate profits languishing overseas and slows the American economy.
So argue Republicans in Congress, who hail their tax overhaul as an economic tonic that will deliver benefits to ordinary Americans well into the future.
Democrats and most nonpartisan analysts see things rather differently — and they point to history to argue their case. They see the Tax Cuts and Jobs Act as an ill-conceived bill that will further enrich the wealthy and swell the government’s debts by at least $1 trillion in the next decade. Previous tax cuts, they note, have done little to boost hiring, raise wages or accelerate economic growth.
Nonpartisan observers expect the bill to deliver far less. The University of Pennsylvania’s Penn Wharton Budget Model says it will increase growth by no more than 0.12 percentage point a year from 2018 to 2027— and swell the federal debt by at least $1.9 trillion in that time.
Kevin Hassett, chairman of Trump’s Council of Economic Advisers, has asserted that the corporate tax cuts alone will end up swelling the average household’s income by at least $4,000 a year.
The Republican tax plan, its architects say, could accelerate such investment. Besides slashing corporate tax rates, the bill lets companies immediately write off the full cost of new equipment.
“It would be good in the short term,” said Sung Won Sohn, economics professor at California State University, Channel Islands. “Corporate cash flow would improve, helping investments. Businesses would be spending money and then hiring people.” But economists caution that the gains will likely be modest in the long run. Companies already hold nearly $2.4 trillion in cash. And they can still borrow at historically low rates. So if they want to invest more, they can already do so.
“It’s not like they’re dying for extra cash,” says Joseph Song, senior economist at Bank of America Merrill Lynch.
Some smaller companies might invest some portion of their tax windfall. But large companies make their capital spending plans years in advance and aren’t likely to make major changes, Song says.
What’s more, most previous tax cuts have produced minimal economic gains. Wages actually fell, for example, after corporate rates were cut in the 1986 tax reform plan. And a one-time cut in the tax on overseas corporate profits in 2004 did little to boost investment or hiring.
Then there’s the timing of the 2017 tax plan. The economy is nearly nine years into its recovery. Significant gains at this point would be unusual. The unemployment rate has reached a 17year low of 4.1 percent.
“Adding additional stimulus at this point, you run the risk of running the economy a little too hot,” Song said. /