Trickle-down tax cut will never work for you...

GOP places risky bet on trickle-down tax cut

Counting on a corporate tax cut to spur the economy, Republicans face a slew of hurdles in delivering the promised benefits of their plan.

By BEN WHITE

Republicans are on the cusp of passing the biggest corporate tax cut in American history, betting it will ignite an economic boom that creates better jobs and fatter paychecks for middle-class Americans.

That boom may never trickle down.

Some economists and corporate executives are already warning that simply lowering tax bills won’t necessarily cause companies to hire more people and pay them better. Instead, they could just wind up returning the extra cash to shareholders.

That could leave President Donald Trump and congressional Republicans celebrating a short-term legislative win that hurts them in the long run, with bigger deficits and little to show for it. And an already deeply unpopular bill — that includes immediate hikes on some individual taxpayers — could become a serious political headache in 2020 and beyond.

“Frankly, I think they are bonkers,” David Mendels, former chief executive officer of software firm Brightcove, said of the GOP banking on a lower corporate rate to generate bigger worker paychecks. “It really doesn’t work that way. No CEO sits there and says, ‘When my tax rate goes down, I’m going to hire more people and pay them more.’”

Tax legislation cleared a key procedural hurdle in the Senate Wednesday ahead of a formal vote as early as Thursday. House and Senate lawmakers will need to convene in coming weeks to hash out a compromise between their two bills.

Even some Republicans seem deeply unconvinced by predictions from members of the Trump administration and more aggressive budget forecasters that slashing the top corporate rate from 35 percent to 20 percent will generate enough economic growth to offset the additional $1.5 trillion in debt the Senate tax plan envisions over the next decade.

That’s led several GOP senators to push for inclusion of a “trigger” that would automatically boost taxes again in a few years if economic growth isn’t fast enough. Sen. Bob Corker (R-Tenn.) described the trigger to reporters as way to “avoid a situation where you’re not creating deficits should the projections that have been laid out not be real.”

Many conservatives despise this idea, because it would mean hiking tax rates in a slow-growing economy — generally considered a disastrous idea — and could undermine the power of the tax cuts themselves by making corporate executives worry they could go away.

“It's hard to imagine a more counterproductive policy than imposing automatic tax hikes on an economy that isn't growing as fast as expected,” Nathan Nascimento, executive vice president of conservative group Freedom Partners, said this week.

Grover Norquist of Americans for Tax Reform called the trigger idea “a self-fulfilling threat to kill jobs.”

Concerns about the impact of the corporate cut have risen in recent weeks as executives on quarterly earnings calls suggested the extra money will likely be returned to shareholders in the form of stock buybacks and dividend payments rather than in building new plants and buying more equipment to make workers more productive.

That dividend and buyback money could still find its way back into the economy in potentially productive ways, but it’s not a direct path to higher take-home pay for average workers.

Top executives from Amgen, Coca-Cola and Cisco have all spoken about increased dividends and buybacks in recent days, according to a Bloomberg survey.

Analysts who follow corporate earnings calls say executives are generally positive about the GOP tax bill. But few are committing to building new plants and factories and hiring more workers, even with the proposal to allow immediate tax write-offs for five years for new capital investments.

John Butters, who analyzes corporate earnings for FactSet, said he didn’t see any specific comments on hiring or wages one way or the other from S&P 500 companies that have commented on tax reform in their earnings calls since Nov. 2. “The sentiment from most companies was positive on tax reform in general overall, but uncertain over whether it will pass and the specific measures in the final legislation if it does pass.”

The cautious approach among corporate executives has created some embarrassing moments for the administration.

At a recent Wall Street Journal conference, National Economic Council Director Gary Cohn asked for a show of hands from executives who would invest more if the tax plan passed. The tepid response led Cohn to ask, “Why aren’t more hands going up?”

Council of Economic Advisers Chairman Kevin Hassett, the administration’s point person for preaching the benefits of corporate tax cuts, later suggested from the White House briefing room that there were actually more hands up than people thought.

“I couldn’t quite see how many hands there were,” he said. “But when I was there, it looked like maybe about half the hands went up. And I think if you go back and look, that it could be that people had time to think about it.”

The administration may also have to worry about a more aggressive Federal Reserve if the tax cuts pass.

The economy is already close to full employment and the central bank is raising interest rates. If the tax cuts lead to higher inflation without increased worker productivity, incoming Fed Chair Jerome Powell could be forced into faster hikes, crimping the benefit of any tax cuts.

In a letter to Sen. Ron Wyden (D-Ore.), ranking member on the Senate Finance Committee, the Joint Committee on Taxation staff said that in assessing the Senate tax-cut bill, it would “assume an aggressive Federal Reserve response to the policy.”

In Capitol Hill testimony on Wednesday, outgoing Fed Chair Janet Yellen said the central bank would not be looking to “stifle growth” but would prefer policies that spur higher productivity and grow the labor force.

Even fierce advocates of slashing tax rates on corporations acknowledge it’s something of a gamble that relies on fairly aggressive economic models and assumptions about corporate behavior to reach the conclusion that workers will see much of the benefit and deficits will not shoot much higher.

“Just give us a chance and in three or four years, if it doesn’t work, it doesn’t work; we all go back to the drawing board,” said Larry Kudlow, a top outside adviser to Trump on the tax plan, in the latest edition of the POLITICO Money podcast. “I get that. But it’s our turn.”

Republicans are counting on predictions from the administration that the corporate tax cuts will produce as much as $4,000 per year in extra pay for households and a 0.4 percent boost to annual economic growth to overcome voter distaste for the tax cut plan.

That distaste is getting worse.

In the latest POLITICO/Morning Consult tracking poll out this week, just 36 percent of voters overall said they support the GOP plan. Among Republican voters, support dropped to 59 percent from 66 percent, suggesting Democrats are having some success with their attacks that the bill is strongly tilted to corporations and the wealthy. The GOP tax plan would slash the estate tax as well as the alternative minimum tax that hits many wealthy taxpayers, including Trump. It would also lower the rate on “pass-through” income for business owners, also including Trump, who report profits on their personal returns.

Both the House and Senate versions of the tax legislation would make tax cuts for corporations permanent. Tax cuts for individuals would expire. Some taxpayers who live in high-tax states would lose deductions and thus face higher tax bills right away.

On the corporate side, the administration argues that lowering the rate to 20 percent and offering immediate expensing will spur businesses to invest and reduce incentives to move operations and profits to low-tax countries, keeping that money in the U.S. and leading to higher worker productivity and higher paychecks.

“A U.S. firm is almost crazy to locate an activity here now, because if they move it to Ireland they pay 12.5 percent but if they put it here they pay almost 40 [percent] if you count state tax,” Hassett said in a recent interview. “Our inaction in the global tax competition has made us the least attractive place on earth to locate an investment.”

Conservative economists argue that data show the corporate cuts could add up to 0.4 percent to GDP growth per year, even though estimates from more conservative budget models that include the impact of higher debt, including the Penn Wharton model and the Tax Policy Center, put the range of additional annual growth at just 0.03 to 0.09 percent over 10 years.

Wall Street economists also question whether slashing the top corporate rate and allowing five years of immediate expensing will add much to economic growth or higher wages. “I’ve argued for years that the multiplier effects on open-ended tax cuts are much lower than generally advertised,” said Rich Bernstein, former chief investment strategist at Merrill Lynch who is now CEO of Richard Bernstein Advisors.

And in a survey of 38 top economists by the University of Chicago, 37 said the GOP tax plan would cause U.S. debt to increase “substantially faster” than the U.S. economy. The one who didn’t said her initial response was a mistake. Only 2 percent of those surveyed said U.S. growth would be “substantially higher” in a decade under the plan.

All of this has left Republicans poised to roll the dice on a tax-cut plan with relatively low odds of success and potentially high costs for failure.

“If they were creating a much more efficient corporate tax system in a way that’s fully paid for, that would be a very good story for them,” Mendels said of the GOP efforts. “Unfortunately, that is not what they are doing.”