The New York Times
January 27, 2018

Are Corporate Tax Cuts Raising Pay? Yes, for Bosses


Recent announcements by Apple, Walmart, AT&T, Starbucks and other businesses that they are giving workers raises, repatriating foreign profits and investing in the United States because of the tax bill Congress passed last year are clearly music to the ears of President Trump and Republican lawmakers. But these statements are also cleverly designed public relations spin that tells us little about the actual long-term economic impact of the tax law.

Let’s put some context around these corporate proclamations. The economy is humming, with the unemployment rate at 4.1 percent. This is, of course, very good news. But beware the spin: Regardless of what’s in the tax overhaul, businesses have an incentive to raise wages to retain and attract workers because of the tight job market. It is also very much in the political interest of companies to attribute to the new tax law the changes they make to salaries or investment plans. That’s a surefire way to win favor with Mr. Trump, a notorious sucker for flattery. And it is a way to deflect attention from the insidious aspects of the tax law: It will add about $1.5 trillion to the federal deficit over 10 years, and many poor and middle-class families will pay more taxes over time.

It’s the corporate elite who stand to benefit most from the tax law. Lloyd Blankfein, the Goldman Sachs chief executive who supported Hillary Clinton in the 2016 election, told CNBC recently that he “really liked” what the president is doing for the economy.

The Republican tax law has slashed the federal corporate tax rate to 21 percent, from 35 percent. The Trump administration has argued that this cut will translate into big raises for workers, but many economists say that most of those gains will actually flow to shareholders and top executives. Take Walmart. The company says it will spend $700 million on bonuses and higher wages for cashiers, drivers and other hourly workers. That’s a tidy sum, but the company is spending far more — $4 billion — to buy back its stock, which will benefit its investors by raising the share price. And it is worth keeping in mind that Walmart also raised wages when tax rates were higher under President Barack Obama.

Apple says it is repatriating most of the $252 billion of cash it holds abroad by making a onetime tax payment of $38 billion to the federal government. The company also has promised to create 20,000 jobs and build a new campus. This sounds great. But thanks to the Republican tax law, Apple will pay at a fraction of the tax rate on its foreign profits that it would have paid at under previous tax law — just 15.5 percent on profits held as cash and 8 percent on earnings held in nonliquid assets like real estate and equipment. It is hard to believe that lawmakers made the right call by giving Apple and other multinational companies this huge tax break. Research has shown that a 2004 law allowing companies to bring foreign profits home at a discounted tax rate did little to boost investment or create jobs and that most of the tax savings went to shareholders.

In cutting the corporate tax rate, Republicans have argued that the 35 percent rate was holding American businesses back relative to foreign competitors. This is hard to square with the fact that companies based in the United States have prospered in recent decades. Apple, for example, has become one of the world’s most valuable companies and went from employing 5,000 people in the United States in 1998 to employing 84,000 this year.

There’s nothing wrong with cutting taxes on corporations as part of a broader reform that closes loopholes, increases American competitiveness and helps create well-paying jobs. Unfortunately, none of those conditions apply in this case.

As many experts have pointed out, corporate tax cuts passed by Congress and signed into law by President Ronald Reagan in the 1980s did not turbocharge wages or investment. Similarly, a series of corporate tax cuts in the last 10 years or so by Labour and Conservative governments in Britain — to 19 percent, from 30 percent — did not produce a boom in wages or investment. In fact, wages grew faster in the United States, according to an article on Vox by Kimberly Clausing, an economics professor, and Edward Kleinbard, a law professor.

It’s great that after decades of anemic wage growth, some workers are finally getting a raise. But if President Trump and the Republicans in Congress were serious about helping workers via the tax code, they had obvious options open to them: They could have cut taxes on the middle class and expanded the earned-income tax credit for poorer workers. Instead, they chose to write giant checks to big investors on the accounts of future generations.

January 29, 2018

Tax overhaul will have a limited effect on U.S. economy, Moody’s says

Companies are more likely to reward shareholders than invest in growth, and the tax cut for the rich will not trickle down, ratings agency forecasts

By Ciara Linnane

The U.S. tax bill signed into law in December will have a limited effect on the U.S. economy, as companies are unlikely to spend their tax savings on growth initiatives while the tax cut for the wealthy will not trickle down.

That’s according to Moody’s Investors Service in a FAQ on the credit impact of the tax bill published Thursday, which warns of a number of negative consequences for federal debt, local governments, utilities and homeowners.

“We do not expect a meaningful boost to business investment because U.S. nonfinancial companies will likely prioritize share buybacks, M&A and paying down existing debt,” said Moody’s analysts led by Rebecca Karnovitz. “Much of the tax cut for individuals will go to high earners, who are less likely to spend it on current consumption.”

More than three-quarters of the $1.1 trillion in individual tax cuts will go to people who earn more than $200,000 a year in taxable income, who constitute only about 5% of all taxpayers, said Karnovitz.

The tax bill will significantly reduce the tax intake of the federal government in the next 10 years in the scope of 1% of GDP on average, Moody’s estimates.

“As a result of the legislation, we expect deficits to widen faster than under our pre-passage baseline, resulting in faster accumulation of federal debt, a component of general government debt,” said Karnovitz.

Wider deficits and higher borrowing needs will come as the Federal Reserve moves to normalize interest rates after the long period of ultralow rates that followed the financial crisis of 2008 and the so-called Great Recession that followed it. “This will increase the effective cost of debt for the government faster than we previously expected, accelerating deterioration in debt affordability,” said Karnovitz.

At the levels of state and local government, it will have the effect of increasing political resistance to tax increases as taxpayers lose the state and local tax deduction, known as SALT. That means state and local governments in higher-tax areas will struggle to pay for services.

Taxpayers losing the SALT deduction will likely reduce their discretionary spending, shrinking sales-tax revenue, which is an important component of state revenue, accounting for 40% on average, according to the National Association of State Budget Officers.

Home prices will likely be hurt, too, as the lower cap on the mortgage-interest deduction reduces the tax incentive for home ownership at the higher end of the housing market.

“Some local markets could face meaningfully slower gains or even modest declines in values, a negative for mortgage performance,” said the analyst.

For utilities, meanwhile, the lower tax rate means they will receive less money from customers, while the loss of bonus depreciation will reduce tax deferrals. “We expect that most utilities will attempt to offset negative financial implications of the tax bill through regulatory channels or through changes in corporate financial policies,” said the report.

For companies, the bill will be credit-positive, if they use cash savings to reduce debt or make disciplined acquisitions, said Karnovitz. If they aggressively increase shareholder rewards, it would be credit-negative. If they opt to hold a lot of cash on their balance sheets, it could be either.

High-yield-debt issuers that now face new limits on interest deductibility may assume less leverage, although with valuations currently high and a lot of private-equity capital available, they are not expected to drastically change their financial policies.

For most issuers, the current rule that they cannot deduct interest expense in excess of 30% of EBITDA is unlikely to change decision making.

“When the metric converts to 30% of EBIT, however, many more companies will have to reconsider their capital structures. This change is expected in 2022, so companies will have to incorporate it into their refinancing plans as well as new leveraged buyouts,” said the analyst.

Private-equity financing overall, however, will be more challenging.

“Leverage is more expensive, and there are new limitations on net operating loss carry-forwards, which are frequently associated with leveraged buyouts,” said Karnovitz. “Some sponsors may consider using preferred equity instead.”

Moody’s analysis is so far borne out by data. Since the bill was signed, there have been more than $33 billion of stock-buyback announcements, according to TrimTabs, a trend expected to accelerate as the fourth-quarter earnings season gathers steam. Many companies have increased dividends, or promised to do so. On Thursday alone, Northrop Grumman NOC, +3.25% said it was raising its quarterly payout by 10%, while 3M Co. MMM, +2.48% raised its by 16%.

Companies have also made a series of announcements of bonus payments or wage increases, which the administration of President Donald Trump has been keen to trumpet as a victory for its agenda.

But as MarketWatch’s Steve Goldstein noted, many of these are one-time measures, and companies have been less that forthcoming about their spending and wage plans before passage of the bill.

Winners and Losers of the GOP Tax Bill

National Economic Council Director Gary Cohn said there is a 100% correlation between the tax policy and what companies are announcing, now that they feel “more comfortable about the economic position they’re in.”

But his former employer, Goldman Sachs GS, -0.33% , seems less impressed.

“In practice, we expect no significant short-term effect of tax reform on average hourly earnings — as it excludes irregular bonuses — and only a marginal boost to the employment cost index — as irregular bonuses are smoothed out,” said a recent note by Goldman Sachs economist Daan Struyven.


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