Doubts arise on whether corporate tax cut would boost growth
WASHINGTON (AP) — For President Donald Trump, what’s good for General Motors is great for American workers. Same for Boeing. And AT&T. Not to mention small businesses.
Trump insists that slashing the corporate tax rate from 35 percent to as low as 15 percent would free up valuable cash. Companies would use the money to boost investment, increase employees’ pay, accelerate hiring and speed economic growth. What’s more, corporations that now keep trillions overseas to avoid U.S. taxes would bring the money home. American companies could better compete with rivals based in countries with lower tax rates.
“We’re going to have magnificent growth,” Trump declared aboard Air Force One on Thursday. “We’re going to go like a rocket ship.”
Would we? Many economists, tax experts and even some business owners say it’s unlikely. Rather than hire, companies might use much of their tax savings to buy back their stock or increase their dividends to investors. Many companies, they note, have already been able to borrow at historically low rates to expand their businesses yet have chosen not to.
“The mainstream economic evidence is that the bulk of corporate tax cuts go exactly to whom you would expect — which is wealthy investors and executives,” said Chye-Ching Huang, deputy director of federal tax policy at the left-leaning Center on Budget and Policy Priorities.
Many economists foresee some benefits from overhauling and simplifying the corporate tax code, just not the extreme growth Trump is promising.
One reason corporate tax cuts might provide little overall benefit is the relative health of today’s economy. Unemployment is already unusually low at 4.4 percent. The economy is in the ninth year of a slow but steady expansion, rather than in a downturn in which tax cuts might deliver a major boost.
In a 2014 paper, two economists — Alexander Ljungqvist of New York University and Michael Smolyansky of the Federal Reserve — concluded that state corporate tax cuts did little to strengthen economic activity unless the cuts were made during a recession. (The flip side is that they found corporate tax increases to be “uniformly harmful.”)
Nor have previous efforts to reduce corporate taxes generally delivered as advertised. Kansas, for example, exempted hundreds of thousands of businesses from corporate taxes and cut individual rates in 2012, only to face a revenue squeeze as the intended economic growth never materialized.
The federal government provided a tax “holiday” on overseas profits in 2004 to bring money back into the United States at a discount to the 35 percent rate. But the Obama administration observed later that the move had diminished tax revenue and unintentionally led companies to hoard cash abroad in hopes of receiving that discount.
There is also concern that a corporate tax cut would swell the federal budget deficit. When the nonpartisan Tax Policy Center published an analysis this week, it found that even if virtually all tax breaks were eliminated, the corporate rate could drop only to 26 percent without increasing the deficit.
Still, many companies stress that lower business taxes would lead to more hiring. John Stephens, AT&T’s chief financial officer, said his company faces a typical tax rate of 34 percent — including federal, state, foreign and deferred taxes — in any given year.
Stephens estimates that lower rates would lead the company to immediately invest more money in its phone network, which he said would lead to more hiring by companies that work with AT&T.
“When we buy more equipment, our vendors hire more,” Stephens said. “When we build more extensive networks, we have people — hard-hat jobs — building those networks.”
The AT&T executive added that “anything” would be an improvement on the current corporate tax rate of 35 percent.
But like many corporations, AT&T also benefited substantially from tax breaks between 2008 and 2015, saving as much as than $38 billion, according to an analysis by the left-leaning Institute on Taxation and Economic Policy. The administration has yet to spell out all the possible tax breaks that would be eliminated to pay for lower rates.
Even if the tax rates were slashed substantially, not all companies would see much of a reason to hire more workers. Bill Parks, who owns NRS, an Idaho-based boating gear company, says the tax cuts championed by Trump would no longer do much to help his business.
Years ago, the lower rates would have helped him because he was maxing out his personal credit cards and taking a second mortgage to fund NRS. But today’s borrowing rates are so low that investing in workers isn’t a burden, and tax changes would make little difference to his plans based on how his company is structured.
Gary Cohn, Trump’s top economic adviser, has argued that the planned tax cuts would help small businesses. By cutting taxes on profits that typically double as the owners’ personal income, those companies would then be able to hire more freely. This assumes that business owners want to expand their payroll rather than just enjoy higher profits.
Larry Summers, a Democratic former Treasury secretary, this month rattled off a list of reasons to reporters why lower corporate tax rates wouldn’t deliver as promised.
Though U.S. companies do face a high rate compared with other countries, Summers said, the fraction of profits being paid in federal taxes is low by historical standards. Corporate income taxes collected last year equaled just 1.6 percent of the economy, according to government records. That compares with 4 percent during the economic boom that followed World War II, an era of growth that Trump appears to want to revive.
Nor, in Summers’ view, would rising stock prices from a lower corporate tax rate shore up the pensions of firefighters, police officers and blue collar workers, as Cohn has argued.
Those few Americans who still have traditional “defined benefit” pensions don’t receive any additional income if the stock market rises, Summers said.
“The argument being made that the corporate tax cuts will somehow benefit workers is weak by the standards of ‘trickle-down’ arguments,” Summers said.
AP writer Catherine Lucey in Washington contributed to this report.