By Sahid Fawaz
Republicans are selling their tax plan as a trickle down paradise for workers. The reality, however, is that companies are not likely to pass down the savings to employees.
"Gary Cohn, the top White House economic advisor, 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-the-cuff question to business leaders listening to Cohn at the Wall Street Journal CEO Council meeting last week: 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, which has become popular viewing in Washington, illustrates what many economists regard as a flaw in the administration’s main selling point for the Republican tax proposal: the argument 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 that the corporate tax cut, to 20% from 35%, 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 Republican 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.
In today’s economy, however, 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, in particular, already have plenty of cash. Borrowing costs are historically very low.
AT&T Inc. this month promised to increase its U.S. investment by $1 billion next year — or about 4.5% of the company’s capital spending this year — if a tax overhaul with a 20% 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 M. Sorenson, chief executive of hotel chain Marriott International, said during an earnings call this month.
Those plans could change in the longer run, he said, 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, which 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 — many 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 USC professor and former chief of staff to Congress’ Joint Committee on Taxation.'"
For the rest of the story, check out the full piece at the Los Angeles Times here.