The White House searched for assurance this week that its tax plan would boost business investment, but didn’t exactly get what it was looking for.
Appearing Tuesday at The Wall Street Journal’s CEO Council conference in Washington, chief Trump administration economic advisor Gary Cohn watched with dismay when attendees were asked whether the reform bill would cause them to spend more on growth. Only a few responded.
“Why aren’t the other hands up?” Cohn asked, according to multiple press accounts.
The moment provided a reminder for a fundamental issue the proposal faces: What if Congress agrees to cut taxes for business and lets companies return overseas profits at a one-time reduced tax rate, but corporate America doesn’t respond?
One of the overriding issues with the plodding post-Great Recession recovery has been the lack of business investment. The administration is hoping that lower tax rates coupled with a path to bring back home the $2.5 trillion or so of overseas cash would generate the kind of investment that would boost growth to 3 percent or 4 percent a year.
However, multiple indicators show that tax changes alone won’t do the trick.
For one thing, the last time the government tried repatriation, in 2004, companies spent the bigger share of the money on share buybacks and dividends. Some of the biggest beneficiaries, in fact, actually cut staff then.
Second, companies already have indicated that much of the benefits they get from tax cuts won’t go directly to growth-related activities.
A Bank of America Merrill Lynch corporate risk management survey over the summer found that 65 percent of companies would first use their savings to pay down the $6 trillion corporate debt tab for U.S. companies. Share repurchases were next at 46 percent while mergers and acquisitions ranked third at 42 percent. Capital expenditures were all the way down at fourth at just 35 percent. (The numbers don’t add up to 100 percent because BofAML told companies to check all uses that apply.)
Of course, there was some good news for the tax bill this week. Some of the political roadblocks that were standing in the way seemed to fade.
In fact, Goldman Sachs said it now gives an 80 percent chance that a bill will be passed by early 2018, up from 65 percent previously. That would give President Donald Trump a legislative victory and possibly add more fuel to the stock market rally, which has been flagging lately.
“The tax reform debate is moving forward faster than we or most other observers expected,” Goldman chief economist Jan Hatzius said in a note to clients. Hatzius said the key is that cost estimates for the bill have been reduced below the $1.5 trillion threshold legislators had set for passage.
The White House did not respond to a request for comment.
WATCH: House Speaker Paul Ryan gives his latest assessment of the tax bill.