Last month a Wall Street Journal editor asked a room full of CEOs to raise their hands if the corporate tax cut being considered in Congress would lead them to invest more. Very few hands went up. Attending was Gary Cohn, President Donald Trump’s economic adviser and a friend of mine. He asked: “Why aren’t the other hands up?”
Allow me to answer that: We don’t need the money.
Corporations are sitting on a record amount of cash reserves: nearly $2.3 trillion. That figure has been climbing steadily since the recession ended in 2009, and it’s now double what it was in 2001. The reason CEOs aren’t investing more of their liquid assets has little to do with the tax rate.
CEOs aren’t waiting on a tax cut to “jump-start the economy” — a favorite phrase of politicians who have never run a company — or to hand out raises. It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised. Had Congress actually listened to executives, or economists who study these issues carefully, it might have realized that.
Instead, Congress did what it always does: It put politics first. After spending the first nine months of the year trying to jam through a repeal of Obamacare without holding hearings, heeding independent analysis or seeking Democratic input, Republicans took the same approach to tax “reform” — and it shows.
The Treasury Department claimed to have more than 100 professional staffers “working around the clock” to analyze the tax cut. If true, their hard work must have been suppressed. The flimsy one-page analysis Treasury released — which accepts the White House’s reality-defying economic projections in order to claim that the tax cuts will pay for themselves and then some — is a politically driven document that amounts to economic malpractice. So does the bill itself.
The largest economic challenges we face include a skills crisis that our public schools are not addressing, crumbling infrastructure that imperils our global competitiveness, wage stagnation coupled with growing wealth inequality, and rising deficits that will worsen as more baby boomers retire.
The tax bill does nothing to address these challenges.
In fact, it makes each of them worse.
Education: The bill, by limiting the deduction for state and local taxes, will make it harder for the localities to raise money for education. The burden will fall heaviest on cities with poor students, making it harder for millions of children to escape from poverty — and leaving more and more businesses with fewer qualified job applicants.
Infrastructure: Restricting state and local tax deductions will also mean less local investment for infrastructure, and by raising deficits, the bill will constrain federal infrastructure spending. Our airports, railways and roads are in desperate need of modernization, and our energy grids are vulnerable and inefficient. Yet spending on those and other needs, which acts as a catalyst for private investment, will become more difficult.
Inequality: If Congress wanted to raise real wages and reward work, there is a simple and proven way to do it: expand the earned income tax credit. Instead, it seems to believe that lower corporate tax rates will magically lead to higher wages, which fundamentally misunderstands how labor markets work.
In addition, by eliminating the requirement that individuals buy health insurance, many young and healthy people will drop out of the marketplace, causing health insurance premiums to rise for everyone else. This is nothing more than a backdoor tax increase on health care for millions of middle-class families that will leave them with less disposable income for savings, investment and spending.
Deficits: The bill’s cost — $1 trillion to $1.5 trillion — makes it more difficult for taxpayers to afford Medicare and Social Security for the baby boom generation, which is now hitting retirement. Republicans didn’t grapple with those costs. Instead, they kicked the can down the road. Ignoring the bill’s price tag, or pretending we needn’t worry about deficits, is like ignoring climate change or pretending we needn’t worry about its effects. I’ll say one thing for Republicans in Congress: They’re consistent.
In effect, the tax bill achieves four main things:
It takes money away from schools and students. It restricts our ability to invest in infrastructure. It does nothing to boost real wages while making health insurance more expensive. It makes it harder to control the costs of Medicare and Social Security without cutting defense and other spending — or further exploding the deficit.
To what end? To hand corporations big tax cuts they don’t need, while lowering the tax rate paid by those of us in the top bracket, and allowing the wealthy to shelter more of their estates.
To be clear: I’m in favor of reducing the 35% corporate tax rate as part of a revenue-neutral tax reform effort. Right now, the corporate code is so convoluted, and rates so high relative to other nations (thereby creating an incentive to keep profits offshore), that the real rates companies pay can be wildly divergent. This is neither fair nor efficient. Eliminating loopholes and reining in the offshoring of profits can and should be done in a revenue-neutral overhaul of the tax code.
Republicans in Congress will have to take responsibility for the bill’s harmful effects, but blame also falls on its cheerleader-in-chief, President Trump. A president’s job is to get the two parties in Congress to work together. Yet Trump is making the same mistake that Barack Obama made in his first two years in office — believing that his party’s congressional majority gives him license to govern without the other side.
The tax bill is an economically indefensible blunder that will harm our future. The Republicans in Congress who must surely know it — and who have bucked party leaders before — should vote no.
— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.