Tax Reform Shows Partisan Priorities

This week’s Courier Herald column:

The Senate managed to cobble together 51 Republican votes last week to pass a major overhaul of the US tax code. All Senate Democrats voted against the measure.

The Democrats have not only decided to double down on their strategy to resist everything, but have also accompanied the vote with histrionic rhetoric, even by their recent standards. Kurt Eichenwald, Newsweek Senior Writer and a frequent critic of President Trump and all things Republican, took to twitter upon the measure’s passage and proclaimed “America died tonight….Millennials: move away if you can. USA is over. We killed it.”

Eichenwald’s need for a fainting couch is spurred by his belief that projections of adding roughly a trillion dollars to the deficit over the next ten years will bankrupt the company. Remember the Democrats’ stimulus package? That did the same thing in one year.

Let’s look at this another way. The Congressional Budget Office projects the federal government will take in $43 Trillion over the next decade. The Democrats arguing the country is over believe that depriving the country of just over two percent of their revenue projections is the end of America as we know it.

Two. Percent.

To be clear, deficits do matter. So do governing philosophies.

Conservatives believe that more money left in the hands of individuals and businesses will grow the economy. A streamlined regulatory environment to keep government out of the way whenever possible is believed to be equally helpful.

While the economy has been growing for almost a decade, Republicans note that the growth has been anemic and below historical standards of economic expansion. Democrats are arguing that those rates are no longer achievable. They argued that once before, using the term “malaise”. That was right before Reagan provided a tax reform plan that propelled growth into a sustained 4% range.

Key among the Republican reforms is a cut in corporate tax rates. American business have been investing offshore, moving our manufacturing base abroad, and keeping many of their profits outside of the US in order to avoid corporate tax rates that are among the highest in the world. Even President Obama understood the negative effect of our corporate rate, proposing to cut it in 2012.

I participated in an interesting twitter exchange with a Democratic State Representative Sunday night on this matter. The subject was whether corporations “flush with cash” needed a tax cut. The level of ignorance of how a corporation must manage its finances for long term success demonstrates the philosophical divide.

The original claim made under debate was that General Motors had $21 Billion in savings on hand, and questioned why it needed a tax cut more than a nurse with $1,500 in savings. This premise ignores that the nurse is also getting a tax rate cut and an increase in his or her standard deduction. It also ignores that part of the reason to provide corporate tax cuts is to give companies like Apple that do have tens of billions overseas to repatriate that money and reinvest it back in America.

GM isn’t Apple. A decade ago GM was bankrupt and was bailed out by measures begun with George W. Bush and completed under the Obama Administration. Today, GM is thriving as a smaller yet growing company.

GM is doing much better, and does have $26 billion cash on its balance sheet as of the end of the last fiscal year. It also has an amount of current liabilities greater than current assets – the amount of payments due within a year versus the amount of assets presumed to be available for such payments. In accounting terms, that doesn’t mean GM isn’t healthy, but it does show that the cash needed isn’t “savings”. It’s the money in their checking account needed to pay the daily bills – employees, suppliers, etc.

GM is in a very capital intensive business, where a redesign of a single vehicle can cost several billion dollars. They must do this for each product, every four-six years. They’re also planning to introduce an entire new range of electric vehicles, which will require even more capital investment than usual. This hits home, as one of GM’s major R&D centers is in the North Atlanta suburbs.

The point is this: Republicans want that money to be invested first in employees and suppliers to grow their businesses, creating more employees and supplier partners. Democrats see a company’s working capital as a priority to fund the government first, and what’s left over can be used as the company sees fit – if they have any left.

More succinctly: Republicans want that money to go to the GM’s employees in Alpharetta, in order to make sure GM is competitive for the next round of new vehicles. Democrats want that money sent to Washington to fund the status quo.

Corporations aren’t getting money that should be given to working Americans. Corporations are being encouraged to invest and create even more working Americans. That money is being invested and creating jobs right here – not by expanding the number of bureaucrats in DC.

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Dave Bearse
Dave Bearse

We’re borrowing a trillion over ten years to reduce the corporate tax rate by 43% forever. The middle class gets a 10% for a few years. Are we great again or what?

“To be clear, deficits do matter.” Thanks for the laugh as I head out the door to work.

Trey A.
Trey A.

It would not be hard to get the Democrats onboard with a corporate tax cut. As Charlie points out, Obama proposed one. Cutting the corporate tax rate makes sense–after all, the big guys with the cash hordes are already gaming the system, but Bob’s Autobody Inc., is paying a really high (by global standards) tax rate. Give Bob and all the small businesses in the U.S. more money, they will reinvest some of it into their businesses. But cutting the corporate tax rate is an illogical means to repatriate cash and jobs. Charlie’s argument assumes that the places where the… Read more »

Lea Thrace
Lea Thrace

My quibble is if this is truly a cut for the middle class, why do those cuts expire? I have asked and have not been given any clear answers. As I understand it, and amendment to the bill to make the middle class cuts permanent was shot down too. These things make me wary about the motivation that the cuts are about helping the working middle class. I would much rather the powers that be just be blatant and say that its corporate tax reform. (I am on board with lowering corporate rates. Though I prefer a gradual lowering to… Read more »

Andrew C. Pope
Andrew C. Pope

The individual cuts are temporary because of the Senate’s procedural rules. In super laymen’s terms: in order to pass a bill with simple majority (thereby avoiding a Democratic filibuster) the bill can’t drive up the deficit 10 years after passage. Without a sunset provision, the Democrats could raise point of order against the tax bill. Overcoming a point of order requires 60 votes. The GOP doesn’t have 60 votes. The corporate tax cuts are permanent because economists on both sides of the aisle will tell you that corporations need certainty and there’s no certainty in a temporary tax cut. Yes,… Read more »

Lea Thrace
Lea Thrace

So was the amendment not adopted because of the rule then?

And does the sunset provision not apply to the corporate side of cuts? Cause those will raise the deficit too (and even more).

Andrew C. Pope
Andrew C. Pope

GOP Senators think that their projected growth figures from all of the cuts (as well as eliminating things like the indivual mandate) will offset the corporate tax rate reduction.

Now, the vast majority of economists will tell you that their growth numbers are feverishly optimistic, but basically the money is there for a permanent courage cut under current Senate budget rules.

xdog
xdog

“corporate tax rates that are among the highest in the world”

Just once I’d like to hear a goper admit there’s a difference between statutory and actual tax rates. Unfortunately, that admission will probably come right after they concede that the process of passage of the 1986 plan was nothing like the current rush to pass an unread, unscored, poorly considered bill that they can wave in the 2018 campaign.

Ellynn
Ellynn

The caveat to all this… Giving a company a tax break to move money does not mean they will. If they do move money, it does not mean they will spend it in a way that benefits the consumer or their workforce (they didn’t 30 years ago) It does not mean they will send it on R & D (see link below), and if it’s a multinational corporation, is does not mean the company even benefit from keeping what money and investment it has in the country.

They could, but they don’t have to…

https://www.wsj.com/articles/passage-of-senate-tax-bill-puts-r-d-tax-credit-in-doubt-1512328243

https://www.independent.ie/business/irish/donald-trumps-15trn-tax-reform-to-hit-irish-firms-hard-36375752.html

Andrew C. Pope
Andrew C. Pope

As we saw in 2003, when Congress cut taxes on dividends, corporations used the savings to pay out more money to their shareholders. Corporate investment is primarily financed through existing revenues. In other words, Apple makes money selling iPhones and re-directs a portion of that revenue into development of next year’s model. CEOs have already indicated, in the past few months, that the savings from a corporate tax rate cut are going to into stock buy-backs and not into investment or expansion. What Charlie didn’t mention what is being cut or discontinued to finance this massive welfare check for corporations… Read more »

bethebalance
bethebalance

While final votes may have been along partisan lines, it’s one-dimensional to say that only Republicans want money invested in employees and suppliers, while Democrats “see a company’s working capital as a priority to fund the government first.” There’s oddly no nuance there, and no room for a large number of budget pragmatists. I think most all Americans would support a globally competitive corporate tax rate. But policies don’t work unless you channel the incentives properly, so if you want the repatriated money to get to jobs, you have to make explicit policy connections. Giving a tax break without such… Read more »

Dave Bearse
Dave Bearse

The effective US corporate rate is in the center or next higher quintile compared to peer nations—it wouldn’t take much cutting to put it in the middle. A more than nominally lower rate could be achieved by eliminating loopholes and special interest provisions.

Noway2016
Noway2016
Noway2016
Noway2016

Sorry for misplacement!

Andrew C. Pope
Andrew C. Pope

This tax bill: – Extends the pass-through provision to non-corporate businesses, allowing the owners of those businesses to pay taxes at 25% instead of 39.9%. Who is more likely to own a pass-through business, the GM employee or a hedge fund manager? – Eliminates the deduction for state and local taxes, effectively double taxing in income the GM employee has earned. Who is more likely to be impacted if states cut back on services like education or increase sales taxes in response to this cut to the SALT deduction, the GM employee or David Perdue? – Repeals the Alternative Minimum… Read more »

Trey A.
Trey A.

Hard to argue with that.

ScottNAtlanta
ScottNAtlanta

Orin Hatch says they cant find the money to pay for CHIP. Thats CHILDREN’S health insurance for the needy which would be around 8 Billion, but sees no problem with financing tax cuts that come up 1.5 trillion short. Deficits didnt matter when GW Bush passed his tax cuts, expanded medicare, and financed 2 wars. They dont matter any more now. What matters is where you are spending and what you get for it. What you get with this tax bill is lots of stock buy backs, and shareholder gain. GE will still pay no tax, and the profits on… Read more »