Commentary: The US Republicans' all-in wager on a tax cut

Commentary: The US Republicans' all-in wager on a tax cut

If the benefits flow mostly to shareholders and business owners, and all the economy gets is a deficit-funded demand stimulus, the Republicans are in dire trouble in 2018 and 2020, says the Financial Times.

US House Speaker Paul Ryan announced the upcoming vote on a sweeping tax overhaul, saying it was "a day years in the making". (AFP/MARK WILSON)

WASHINGTON: Before the Republican tax bill passed the United States Senate, Speaker of the House Paul Ryan made his pitch: “The bottom line here is that a typical family making the median family income will get a US$2,059 tax cut next year.”

This is an extremely telling comment. Yes, almost all tax brackets, including the middle ones, will see their income tax rates fall in most of the 10 years before the cuts expire (they must expire, given Senate budget rules which impose fiscal restraint). But to say that the “bottom line” of the bill is a tax cut for average families is bizarre. 

Set aside the fact that the distribution of the individual cuts is tilted - in dollar terms, and in some cases in percentage terms, too - towards families above the median. That is made explicit in the Joint Committee on Taxation’s analysis. 

A TAX CUT FOR BUSINESS

More to the point, the tax plan is, before it is anything else, a tax cut for business. The move to a lower tax rate for corporations and for “pass-through” entities contributes the bulk of the US$1.5 trillion in additional debt the bill will bring over a decade. And the business cuts do not expire.

Yet the Speaker is compelled to talk about the cut in terms of families. The reason for this is clear enough. His party did not win the presidency with the promise to help American businesses — which are, on the whole, nearly as profitable as they have ever been, and which have easier access to cheap capital than they have ever before enjoyed. 

President Donald Trump won his job promising to protect the men and women who have been left behind by technology and globalisation. Mr Ryan’s rhetorical options were limited.

There is, of course, a deep connection between business and individual prosperity. If the cash the tax cut hands to companies contributes - directly or indirectly - to business investment, worker productivity should increase, and wages will follow. If this happens, and wages rise with growth, the complaints about the bill - its generosity to the well-to-do at a time of inequality, its limp efforts at proper reform - will be politically irrelevant. 

If the benefits flow mostly to shareholders and business owners, and all the economy gets is a deficit-funded demand stimulus, the Republicans are in dire trouble in 2018 and 2020. The economic arguments over which outcome is more likely are by now well rehearsed. The bill has passed both houses of Congress. All that is left is to see what happens.

Halfhearted though they are, the efforts at genuine reform in the bill deserve mention. Reduced individual deductions for mortgage interest and state and local taxes, and the corporate deduction for debt costs, will do something to remove bad incentives. They were watered down along the way, but provide a spark of hope that more can be done in the future.

A DEVILISHLY HARD PROBLEM

In time, the reform with the most impact is likely to be the change to the treatment of US companies’ foreign earnings. The old system, under which profits were taxed globally but the tax was deferred until repatriation, is well lost. The one-time lower rate for repatriation is an acceptable compromise.

The question is whether the new system, which imposes a set of alternative taxes on foreign earnings - but at a rate much lower than the domestic one - will effectively discourage the offshoring of profit, facilities and people. The Republican solution is clearly imperfect, but then the problem is devilishly hard.

The Republicans appear to have their first legislative victory of the Trump administration. It will give them a short-term boost. In the long term it is an all-in political wager, and it is deeply uncertain how the dice will come up. That is the real bottom line.

© 2017 The Financial Times Ltd. All rights reserved. Not to be redistributed, copied or modified in any way.

Source: Financial Times/ms

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