GOP says tax cuts will lift wages
But CEOs might have other ideas, some experts say
WASHINGTON — Gary Cohn, the top White House economic adviser, was onstage making the Trump administration’s case that a huge cut in corporate taxes would trigger a surge of business investments.
Then came an off-thecuff question to business leaders listening to Cohn at the recent Wall Street Journal CEO Council meeting: How many will increase investments if the Republican tax plan is enacted?
TV coverage showed about three dozen executives sitting near the stage. Only three of them appeared to raise their hands. An incredulous Cohn responded: “Why aren’t the other hands up?”
A video clip of that moment illustrates what many economists regard as a flaw in the administration’s main selling point for the GOP tax proposal — that a dramatic cut in the U.S. corporate tax rate will be a boon to America’s middle class.
The White House Council of Economic Advisers promises the corporate tax cut, to 20 percent from 35 percent, would lead to an increase of at least $4,000 a year in average household income.
But that calculation depends on an assumption that workers would get a much bigger cut of the corporate tax savings than most economic studies — including those by the Treasury Department and Congressional Budget Office — have shown.
Most economists agree that the GOP tax plan will boost business investments. And that should lead to more hiring, greater productivity and increased company profits that would, in theory, prompt employers to raise wages.
But in today’s economy, experts said it’s unrealistic to expect the kind of investment bonanza that proponents of the tax plan are banking on.
One of the key drivers of investment is access to money, which hasn’t been a problem for most businesses. Large companies already have plenty of cash. Borrowing costs are low.
AT&T Inc. this month vowed to hike its U.S. investment by $1 billion next year — or 4.5 percent of the company’s capital spending this year — if a tax overhaul with a 20 percent corporate rate is signed into law.
But other CEOs, as they were at the Washington forum, have been less enthusiastic about increased spending.
“If you wave a wand and say tax reform is done, and our … taxes decline by a certain amount, I don’t think that, by itself, is going to change our capital availability,” Arne Sorenson, chief executive of hotel chain Marriott International, said during an earnings call this month. He said those plans could change in the longer run, but for the near term, the savings are “probably likely to go back to shareholders.”
That’s in line with the preponderance of economic research that suggests most of the benefits of corporate tax cuts end up flowing to shareholders through stock buybacks or increased dividends and not to increasing the pay of ordinary workers.
It takes awhile — years, by some accounts — before the gains from the tax cuts would work their way down to the average American.
“It’s a fantastically poorly targeted way of delivering a middle-class tax cut,” said Edward Kleinbard, a University of Southern California professor and former chief of staff to Congress’ Joint Committee on Taxation.
Kevin Hassett, chairman of the White House Council of Economic Advisers, acknowledged that it optimistically could be three to five years before the average household could get the $4,000 to $9,000 annual boost in income that his study estimated.
“If you go to the pessimistic side … it would be about double that” amount of time, Hassett told a Yahoo Finance All-Markets Summit last month.
Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, reckoned it would be more like 10 to 20 years. He said it was misleading for administration officials like White House press secretary Sarah Huckabee Sanders to be tweeting, “What would your family do w/ a $4,000 raise from the President’s tax cut plan?”
“It’s foolishness, complete foolishness,” Rosenthal said.
It’s widely believed that the corporate tax cut, plus allowing for immediate, full deduction on investments, would spur some companies to spend more on capital expenditures — land, buildings and equipment. That spending has been slow over the last decade, although it has picked up this year.
The nonpartisan Tax Foundation estimated that the Senate bill, including changes in individual income taxes, would boost wages in the long run by 2.9 percent and generate an additional $1.3 trillion in tax revenue over 10 years. That would reduce the estimated increase in the federal budget deficit over 10 years to around $500 billion.
But economists agree there’s little evidence to support the idea that the lost revenue from tax cuts is offset by the additional economic growth they produce. Most analysts’ calculations have concluded the GOP plan would result in a bigger hit to the federal budget, closer to $1.5 trillion over a decade, exacerbating the federal debt and leading to increased government borrowing and interest payments.
That would push up interest rates more broadly, and reduce the investment and economic gains otherwise expected from lower taxes.