Will the Corporate Tax Cut Really Help the U.S. Economy?
The United States Congress just passed an historic tax reform package which includes a significant reduction in the top corporate tax bracket. Proponents of the package have asserted that this reduction will lead to a surge in the U.S. economy. This surge, so the argument goes, will more than offset the estimated $1.5 trillion the Congressional Budget Office (CBO) says the new law will add to the national debt over the next ten years. If I may, I would like to take a few minutes of your time to apply some facts to this argument.
Will the Tax Cut Help Corporate America?
According to a 2016 study by the U.S. Government Accountability Office (GAO), during the years 2006-2012, at least two thirds of all active corporations had zero tax liability after taking tax credits into account.1 While it is tempting to blame the 2008 recession for the low rate of tax liability, the year with the lowest tax payments was actually 2006.
A separate study by the Tax Policy Center reported that 90% of all corporations currently have a tax rate below 10%.2 The fact is that the new law eliminates some corporate tax deductions, so it could actually cause corporate taxes go up, not down.
Will Companies Hire and Expand Under the New Law?
Republicans argue that tax savings from the lower corporate rate will cause businesses to increase capital expenditure, and hire more workers. This will cause the economy to grow, and tax revenue to rise, covering the estimated $1.5 trillion cost of the tax reform.
Various independent studies have argued that companies are not likely to save anything at all from the tax law, but the answer to the “hire and expand” question actually comes from the Federal Reserve Bank of Atlanta, and from the Wall Street Journal CEO Council.
The Atlanta Fed regularly conducts a Business Inflation Expectations Survey. In the most recent surveys, they included a new topic: Expected Impact of Tax Cuts and Jobs Act. They asked businesses how passage of the tax bill would affect their hiring plans, and their capital investment plans. Only 8% said they would increase hiring significantly, and just 11% said they would increase capital investment significantly. Fifty-nine percent said they would make no change in their hiring plans, and 46% said they would make no change in their capital investment plans.3
The Wall Street Journal CEO Council members said any savings from passage of the tax bill would likely go to increased dividends and stock buybacks, as it has in the past. They said that lowering taxes, and thereby increasing profit margins was nice for the companies, but if demand for products and services didn’t increase, there was no reason to hire or invest above their current levels.4
What is the Impact on the National Debt?
The tax bill was designed to limit the increase in the national debt to $1.5 trillion over the next ten years. That figure was not arrived at as the answer to an economic question. It was arrived at because under Senate rules, the bill can be passed with just 51 votes as long as the debt increase is only $1.5 trillion. If the deficit increase goes above that level, the bill would require 67 votes to pass. Since there are only 52 Republicans in the Senate, the answer is to design the bill to require just 51 votes.
What I have not seen discussed anywhere in the media is what the overall national debt is forecast to be in ten years. It might be reasonable to assume that if the debt today is $20 trillion, and this bill adds $1.5 trillion over ten years, the total debt in 2027 would be $21.5 trillion. Federal budgeting is a unique process, though.
The budget process includes automatic spending increases each year so that no one has to go on record and vote for more spending. As a result, the CBO has calculated that the national debt is already going to increase by $10 trillion over the next ten years, even with no tax reform bill. That means that in 2027 the national debt is forecast to be $31.5 trillion under the new tax law, and $30 trillion without it.5
Keep in mind that for the fiscal year 2017, which ended on September 30 of last year, the federal government paid $269 billion in interest on the national debt, accounting for 7% of all federal expenditures.6
It’s 1982 all over again! Or is it?
Some people who strongly support the new tax law have compared it to the tax cuts passed during the Reagan Administration. They try to draw parallels to the incredible economic growth that occurred at that time, but the economic environment in 1982 is a world away from where we are now.
In 1982 the Federal Funds Rate (the rate set by the Federal Open Market Committee) was 18% and falling. Today it is 1.50% and rising. The interest rate on a 10-year U.S. Treasury Bond was 15% versus 2.54% as of this writing on January 11, 2018.
Total U.S. debt compared to the total size of the U.S. economy was just 0.90 times in 1982, compared to 3.6 times today. Perhaps most importantly in terms of long-term growth potential, in 1982 the median age of the baby boom generation was 26. Today it is 60.[7] The world is a different place. We should not expect the same results.
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[1] Trump’s Corporate Tax Slash Ignores How Little Companies Already Pay; Erik Sherman, Forbes Magazine, April 24, 2017;
[2] Bull Trap: The False Promise of Tax Cuts; ZeroHedge, October 5, 2017;
[3] Federal Reserve Bank of Atlanta, Business Inflation Expectations Survey, November 20, 2017;
[4] Wall Street Journal CEO Council Conference, as reported by Business Insider, November 30, 2017;
[5] Federal Debt Forecast; Congressional Budget Office; cbo.gov; November 2017;
[6] Ibid.
[7] All comparison figures courtesy of the Federal Reserve Bank of St. Louis, Bloomberg Financial Services, and the U.S. Bureau of Economic Analysis (BEA).
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