A tax cut that lifts the economy? Opinions are split

With the release of an ambitious overhaul of the tax code, House Republicans are moving to fulfill a long-held desire of corporate America: a large and audacious tax cut.

Yet economists are divided over whether the plan is likely to revitalize the economy or merely bestow a windfall on the wealthiest investors.

Even before President Trump vowed as a candidate to sharpen America’s competitive edge, Republicans led by the House speaker, Representative Paul D. Ryan of Wisconsin, were arguing that large tax cuts would unleash a hurricane of economic activity.

“With this plan, we are making pro-growth reforms, so that yes, America can compete with the rest of the world,” Mr. Ryan told reporters Thursday on Capitol Hill. “This is a very important and special moment for our country, for all Americans.”

Economists are still parsing the details, but even some ardent supporters of the plan say expectations about heady growth and job gains are exaggerated. Interest rates are already at bargain-basement levels, plenty of potential investment capital is sloshing around, and the official jobless rate is at lows not seen in many years. Moreover, the cost of the tax package will inevitably deepen the deficit and lead to spending cuts that are likely to hit low- and middle-income workers.

“It’s hard to see the stimulative benefit on the economy,” said Lawrence H. Summers, a Treasury secretary under President Bill Clinton. “Most of the benefits as best I can tell will go to wealthy people. The idea that you’re going to get a huge spur to growth is delusional.”

Such dismissiveness failed to deter fans of the twin pillars of the House bill: lowering the top nominal tax rate on corporations to 20 percent from 35 percent, and changing the way global profits are taxed.

“This will make the United States a better place to invest and a better place to be headquartered in,” said Mihir A. Desai, an economist at Harvard Business School who has at times complained about the White House’s economic claims.

Under the current system, multinational corporations have been shopping around the globe for countries with low tax rates where they can locate their profits and sometimes their operations. Those global profits are taxed by the United States, but only after they are booked at home. The result is that companies warehouse trillions of dollars offshore, indefinitely postponing the payment of United States taxes.

Tax rates don’t single-handedly drive investment decisions, and even now deductions and tax credits often shove the rate paid by corporations far below the 35 percent maximum. Still, many economists argue that matching or undercutting the top rate in other advanced industrialized countries — particularly in Western Europe — should encourage investment and productivity.

Slashing the rate to 20 percent is “a pretty dramatic change in the attractiveness of the United States relative to other countries,” said Alan Viard, a tax specialist at the conservative American Enterprise Institute.

Companies were noncommittal on how the plan might actually change their tax practices — like those of Corning, the glass and ceramics manufacturer, which had $3.2 billion of cash and cash equivalents outside the country on March 31. “Given the complexity of our U.S. taxation system,” a spokesman said Thursday, “the devil will lie in the details of any new legislation.”

A shift to taxing domestic and not foreign profits is aimed at discouraging multinationals from moving headquarters, investments and recorded profits abroad. Most other nations have embraced some version of this approach, known as a territorial system.

But economists are split on whether that will reduce or worsen global tax avoidance. The bill proposes a global minimum tax of 10 percent to ensure that companies will have to pay something no matter where they have their headquarters. If they pay a lower rate in a foreign country, they would have to remit the difference to the United States. What could bite even harder is a proposal to tack a 20 percent excise tax on transactions between multinationals and their foreign affiliates to deter them from stripping profits out of the United States tax base.

No safeguards are foolproof, supporters concede, but they argue that’s the price of admission. “The reality is, base-erosion rules will always be messy and imperfect,” said Douglas Holtz-Eakin, a conservative economist and a former director of the Congressional Budget Office. “If you want a territorial system, get over it.”

Yet if the House plan resolves some longstanding issues with the corporate tax code, it also creates new ones. Congress has, in effect, set aside $1.5 trillion over the next 10 years to pay for revisions to the tax code, but to keep the cost of the plan to that limit, the Republican leadership is relying on financing gimmicks to phase in some provisions, or put time limits on others.

A proposal that allows companies to immediately deduct business expenses rather than stretching them over a number of years potentially has the most impact on smaller companies that need money to build up or expand their business. Indeed a hefty chunk of the administration’s growth estimates is based on the extra investing it is supposed to cause.

But the proposal has a five-year time limit. “If expensing goes away at the end of 2022, they should not expect any permanent growth effect,” said Mr. Viard of the American Enterprise Institute.

For businesses, predictability about the tax code is as important as any specific alteration. And temporary measures that obscure the costs deter long-term investment. New low rates and breaks will not be sustainable over the long term if they do not provide enough money to run the government.

“If they want to claim credit for the growth effect,” Mr. Viard said, “then they have to claim responsibility for the revenue loss.”

All would-be tax reformers juggle varying goals. They want to entice domestic and foreign companies to invest in the United States, which should, in turn, produce more jobs and stockholder returns.

They want to create a system that is widely judged as fair.

And they need to collect enough revenue to keep the lights on. That includes having the money to cover Social Security payments, antiterrorism measures and disaster relief, as well as maintaining or upgrading the educational, transportation, technological and other systems that undergird the nation’s overall economic strength.

Critics worry that the focus on corporate competitiveness gives other goals short shrift.

“The corporate rate cuts are a windfall immediately for stockholders, and not workers,” said Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center. And because 35 percent of United States stocks are foreign-owned, he calculated that $70 billion a year of the tax benefits would go to people in other countries.

As for working people, he labeled the supposed benefits a “sideshow” because they come so far down the road and are so speculative.

As economists can attest, American competitiveness can be an elusive concept.

“Business folks won’t describe it like this, but I think the best way to describe what it means to be more competitive is to describe it in terms of increasing the standard of living of the American people,” said Michael J. Graetz, a professor of tax law at Columbia Law School. “If it doesn’t do that, then why do we care?”

Source: cnbc economy
A tax cut that lifts the economy? Opinions are split