Reports suggest that the US Congress is making progress toward tax reform. The House of Representatives is still slated to vote on its version tomorrow. It appears likely to pass. The Senate version will be marked up in committee this week. The latest revisions include repealing the individual insurance mandate and ending the middle class and small business tax break after 10 years to reduce the long-term costs while keeping the corporate tax cut permanent.
Many proponents of the proposals make it seem that a corporate tax cut is a panacea for all that ails the US. It will boost investment, which in turn will boost productivity. It will boost wages, which in turn will boost aggregate demand and inflation.
Why would anyone in their right mind object? The simple answer is history. In the recent history of tax changes, there is not much evidence that a corporate tax cut boosts investment or wages. The “trickle down” economics, which the Chair of the National Economic Council, specifically called the current proposals, used to be an epithet. It was a note of derision, and yet in a surreal and Orwellian way, it was used to defend justify it.
Reports suggest at yesterday’s WSJ CEO Council, Cohn, the Chairman of the National Economic Council was surprised that not more corporates planned on increasing investment if the tax reforms were implemented. There is a good reason not to be surprised. First, corporations have reported record profits. The lack of investment is not due to the lack of funds.
Second, businesses have been saying to whoever will listen that it does not plan to invest a windfall from lower taxes. A large US bank surveyed its 300 +corporate clients over the summer and found the that paying down debt was going to be their chief use of funds freed up by lower taxes. After paying down debt, share buybacks and acquisitions were most frequently cited. New investment and R&D was toward the bottom of the priorities.This is consistent with what businesses actually did after 2004 Homeland Investment Act, which dramatically cut taxes on repatriated earnings.
