The Finance 202: There is something very strange about the GOP tax plan

The following article by Tory Newmyer was posted on the Washington Post website November 22, 2017:

Here’s one way to tell whether a tax code rewrite is headed in the right direction: Corporate lobbyists should be whining that their private breaks are getting squeezed too hard, and economists should be cheering because the trashing of those preferences is paying for lower overall rates that could fuel new growth.

Neither of those things is happening. And the Republican push to overhaul the code is far enough along that it’s raising alarms from economists across the country. The latest came Tuesday, when only one of 42 top economists surveyed by the Initiative on Global Markets at the University of Chicago Booth School of Business thought the tax proposals moving through Congress would meaningfully expand the economy over a decade (22 disagreed or strongly disagreed, 15 were uncertain and the rest didn’t answer). And none of those economists, a sampling spanning the ideological spectrum, disagreed the measures would leave the nation saddled with a substantially heavier debt load relative to the size of the economy. 

Add that verdict by academic economists to those from Washington think tanks and Wall Street banks, chronicledin this space yesterday. The nonpartisan Tax Policy Center summarized the “crowding out” effect that most expect from all the borrowing that the federal government will need to do to finance the tax cuts:

Although the legislation would increase incentives to save and invest, it would also substantially increase budget deficits unless offset by spending cuts. Higher deficits would push up interest rates, which would tend to discourage investment. Thus, while the plan would initially increase investment, we estimate that rising interest rates would eventually negate the incentive effects of lower tax rates on capital income and decrease investment below baseline levels in later years.

From Martin Sullivan, chief economist for the nonpartisan Tax Analysts:

Meanwhile, corporate lobbying around the debate — typically a bench-clearing brawl on K Street, because the tax code reaches into everybody’s pockets — has been weirdly subdued. That’s in part by design, as congressional Republican leaders have sought to speed the measures through the process to stymie organized opposition: Many vested interests have had difficulty modeling the impact of complex new provisions on their bottom lines in time to register their views before key votes.

But the relatively muted response also reflects a C-suite complacency toward proposals roundly judged good enough. Indeed, both the House and Senate bills amount to net wins for businesses. The Senate version offers $2.2 trillion in business tax cuts for $1.5 trillion in business tax increases, a $700 billion windfall,according to an analysis released Friday by the Committee for a Responsible Federal Budget. That study showed the House version is even more generous, handing businesses a $1.1 trillion net tax cut.

The last major rewrite of the code, enacted in 1986, succeeded despite unleashing a maelstrom of corporate resistance, because it used increased revenue from the corporate side of the code to make up for decreased revenue from individual taxpayers. Economists still debate the legacy of that law.

The update now taking shape in Congress tips the code in the opposite direction, explaining the corporate quiescence. But the near-consensus view from economists of all stripes that it won’t achieve its organizing goal flashes a warning signal to the lawmakers aiming to enact a desperately sought accomplishment before the midterm elections.

View the post here.