JPMorgan: Tax Cut Not Too Impressive

Immediately following the passage of the “Tax Cuts and Jobs Act of 2017” (TCJA), companies such as AT&T, currently seeking Trump administration approval for a Time Warner merger, was quick to provide positive reinforcement. Along with Wells Fargo and many other corporate beneficiaries of the tax plan, they announced programs to reward employees and expand jobs in the US. When Michael Cembalest looks at the situation, however, he sees a different picture. The Chairman of Market and Investment Strategy at J.P. Morgan Asset & Wealth Management looks at the budget deficit with concern as he says the tax cuts were not needed in the economy and “tax cuts are primarily channeled to taxpayers with incomes between $100k and $500k.”

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Tax cuts not popular at JPMorgan:  "Tax Cuts Don't Pay For Themselves"

In a December 19 presentation, the slides of which were reviewed by ValueWalk, JPMorgan makes its feelings known – they generally see no point and little long-term benefit to the tax cuts while bemoaning the increase in deficit spending.

The last tax cut, the Tax Reform Act of 1986, was largely revenue neutral, according to Politifact. The current tax cut is projected to add $1.4 trillion to the deficit by 2027, according to the Congressional Budget Office’s analysis of the Senate tax bill. This estimate does not include any offset from economic growth that may result from the cuts.

“What happened to all the fiscal conservatives in the GOP?” Cembalest wondered. Previous tax cuts occurred when debt/GDP ratios were less than 40%, now they are alarmingly above 100% and growing.

Citing an October 4 JPMorgan report, “Tax Cuts Don’t Pay for Themselves,” Cembalest is concerned that the US federal budget is trending in the wrong direction.

“As a reminder, the budget deficit is already growing again, which is unusual for this point in the business cycle (when it is usually improving),” Cembalest says, noting that the tax benefits will fade over time. Not only will the benefits fade, he says, but there might also be little point. “Since the US is close to full employment and since the output gap has disappeared, there are no cyclical reasons for a tax cut.”

The wealthy who benefit most are the least likely to spend the money they receive

While the impact on the economy is unclear if unnecessary, JPMorgan also questions what type of taxpayer will most benefit from the move. While large profitable corporations that operate on a multi-national basis will see the clearest benefit – not only does the tax rate go down, but they can repatriate profits at 8% to 15% -- the wealthy who benefit from the tax plan are the least likely to help the economy.

The largest individual beneficiaries based on the distribution of federal tax change goes to earners in the 95% to 99% quintile, with the top 1% receiving the second most, according to a Urban Institute – Brookings Tax Policy Center study that JPMorgan cited in their presentation. The lowest quintile receives the lowest benefit.

The problem is that people in the lower quintile are the ones most likely to spend money. “While TCJA tax cut is sizable, TCJA beneficiaries have lower propensities to spend (i.e., low fiscal multipliers),” the report noted, pointing to corporate tax provisions that primarily impact cash flow as having the lowest fiscal multiplier. Nearly one third of all US stocks are owned by foreigners, making any gain in the stock market unlikely to “trickle down” to the same extent.

“Highest fiscal multipliers are linked to government spending rather than tax cuts, and peak during or right after recessions,” the report noted. “Given corporate and high income beneficiaries of the bill, and ample current liquidity, we don’t envision much of an immediate boost to GDP from TCJA.”