FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 3, 2017
- Second Quarter GDP Rose by Better Than Expected 3.1%
- Cutting the Corporate Tax Rate Would Benefit Everyone
- Corporate Tax Cuts Great for Companies, Better for Workers
- Benefits of Tax Cuts Go More to Workers Than Fat Cats
In my September 7 Blog (be sure to subscribe at garydhalbert.com), I argued that the sky-high US corporate income tax has been a big reason why worker wages have been stagnant for over a decade. As talk of a meaningful drop in the US corporate income tax rate has gained momentum in recent weeks, we have seen even more evidence of how a cut in the business tax rate could help worker pay.
Furthermore, there is growing evidence that a lower corporate income tax rate would not just help worker wages over time, but also pass down to better economic conditions in general. While the mainstream media continues to talk down a cut in the corporate income tax rate, I’ll argue just the opposite today. I think you’ll agree.
But before we get into that discussion, let’s take a brief look at last Thursday’s better than expected final report on 2Q gross domestic product.
Second Quarter GDP Rose by Better Than Expected 3.1%
US economic output grew at a 3.1% annual rate in the 2Q, slightly stronger than previously thought and marking the best growth in two years, according to the latest report last week. The estimate, based on revised data released by the Commerce Department on Thursday, replaces a previous tally of 3% growth. Economists surveyed by The Wall Street Journal had expected the estimate to remain at 3%.
While the 3.1% showing in the 2Q was slightly better than expected, the economy at its core remains stable, as steady job growth and a booming stock market encourage households to spend. Consumers accounted for more than two-thirds of economic growth in the 2Q with spending rising at a 3.3% annual rate.
Yet the slightly better than expected report did little to alter the picture of an economy that rebounded in the spring after a lackluster winter and then lost momentum in recent months as hurricanes tore into Texas and Florida.
Many private-sector economists estimate economic output to grew at a rate of between 2% and 3% in the 3Q. They expect similar growth in the year’s final months and early next year as hurricane-hit communities rebuild, consumers and businesses step up spending broadly and the global economy gains traction.
While last week’s slightly better than expected GDP report was a welcome surprise, it will take more than one quarter of growth exceeding 3% to conclude that a stronger growth trajectory can be sustained. So, it remains to be seen if 3+% GDP growth can continue.
Meanwhile, Thursday’s report showed corporate profits were weaker than previously thought in the spring. After-tax profits, without inventory valuation and capital consumption adjustments, dropped 2% from the 1Q instead of the previously reported rise of 1.4%. The good news is, profits were still 7.4% higher from a year earlier.
The bottom line is, we’ll have to see if 3+% GDP growth can continue. Currently, that does not look likely as most 3Q estimates are in the 2-3% range. While the economy at its core remains stable – and steady job growth and a booming stock market encourage households to spend – it remains to be seen if GDP growth will top 3% for the 3Q and 4Q.
Cutting the Corporate Tax Rate Would Benefit Everyone
When you hear the current talk about cutting the income tax rate for US corporations, who do you think that benefits? Do you initially think it simply benefits corporate fat cats and puts even more money in their pocketbooks? Or do you think it benefits middle-class workers and others who might get a pay raise?
Probably the former rather than the latter. Unfortunately, too many Americans buy into the popular misconception that such a tax cut would benefit only corporate fat cats. That’s what the mainstream media would have us all believe.
Yet the truth is, a tax cut for corporations is a tax cut for the average American family.
Here’s why. The United States has the highest corporate income tax rate in the developed world – a top marginal federal rate of 35%. When you include the state and local income tax rates, it rises to nearly 40% in many states.
Unfortunately, most Americans don’t realize this, and that includes many who work for corporations that pay this high tax rate. Among those workers who do realize this, many think it’s a good thing that their employer has to pay a high income tax rate. They’re rich, after all.
But that line of thinking makes no sense when you consider what the corporate tax does. With our high corporate tax rate, business owners wind up with a lot less money to spend. That means they’re investing less in the very businesses that employ the workers. That means fewer jobs, lower wages and less-competitive businesses.
Indeed, a corporate tax cut is actually a remarkably “progressive” tax change, as it benefits workers who earn their income in the form of wages. And those at the bottom of the income scale stand to gain the most from it. Study after study has shown that one of the biggest benefits of a corporate income tax cut is higher wages for workers.
Higher wages for workers directly translate into more consumer spending, and consumer spending accounts for almost 70% of GDP. Thus, a cut in the corporate income tax rate benefits everyone – despite what you hear in the mainstream media. Here’s more.
Corporate Tax Cuts Great for Companies, Better for Workers
In my opinion, the most important provision in the GOP tax reform package unveiled last week by President Trump was the big cut in taxes on corporations and small businesses. As you might expect, they were characterized by the left and the media as “tax cuts for the rich.” Nothing new about that.
Yet in fact, corporate income tax cuts are one of the best middle-class tax cuts of all. How we tax businesses is among the most distorted, costly and anti-competitive elements of our tax code. As discussed above, US corporations competing on the world stage face a top tax rate of 39% or more in many states, compared to a 23% average for the rest of the world.
The proposed Republican tax reform would slash that rate to 20%, slightly below the global average. I would have preferred that President Trump would have stuck with his original idea of a 15% corporate tax rate and bargained up to 20%. Since he started at 20%, he’ll be lucky to get it.
The new tax plan would also shift the US to a "territorial taxation" model, which keeps overseas profits from being taxed twice – once when the profit is earned overseas, and again when repatriated to the US. America is almost alone among nations in doing this.
If this change passes, it will level the playing field between US-headquartered companies and foreign-headquartered companies by keeping our rates low. This will serve to keep US companies from buying foreign companies and relocating their headquarters overseas to take advantage of lower rates.
And there are significant benefits for small businesses as well. Among other things, the plan cuts levies on so-called “S corporations” (small businesses and sole proprietorships, in which the profits go to the owner's individual tax form) to 25%. This will give many small business owners who now pay super-high individual tax rates of 30% to 39% a big tax cut.
Let us not forget that small businesses create the vast majority of new jobs in the US.
The GOP tax plan also lets businesses write off investments (except for structures) immediately. If it passes, and it should, this will let companies recapture the value of their investments more quickly, thereby lowering their tax bite now and boosting profits later on.
The plan also includes getting rid of the estate tax (aka the "death tax") paid when someone dies and leaves a business or valuables to loved ones. The death tax is one of the cruelest taxes in existence, since it takes from someone what they worked their entire lives to leave to others – and which they had already paid tax on. Unfortunately, this tax forces many families to sell or dismantle successful businesses to pay the estate tax.
Benefits of Tax Cuts Go More to Workers Than Fat Cats
Here’s the point of all this: The main benefits of these proposed tax cuts won't just go to fat-cat owners or investors, as Democrats and the media would have us believe. The real benefits will largely go to workers.
Study after study shows this to be true: The bulk of higher corporate taxes are paid for by workers in the form of much lower wages. As Adam Michel of the The Daily Signal noted last week, "Despite the name — 'corporate' tax reform — the burden of the corporate income tax falls almost entirely on workers in the form of lower wages."
The reason for this is straightforward: Higher taxes mean less investment. Less investment means older equipment, less training for workers and thus fewer up-to-date work skills. Ultimately then, it also means lower incomes for less-productive employees. Properly seen, corporate tax cuts are really worker tax cuts.
By the way, that's not just opinion. A survey of tax-cut research by the Heritage Foundation found 10 studies demonstrating that corporate tax cuts improve worker welfare by upgrading their skills, improving the equipment they work with and boosting their pay.
Another recent study, this one published in August by economists Andrew Hanson of Marquette University and Ike Brannon of the Cato Institute, concluded that "recent tax reform discussions that propose a (corporate) rate reduction between 30% to 57% ... would imply employment gains between 6% to 22% and wage increases between 15% to 28%."
Sadly, because of the relentless anti-business bias of the US media, many Americans think corporations are "greedy," and so they should be taxed to the hilt. As I pointed out in my blog last week, a recent poll found that 42% of Americans don’t believe we should be cutting income taxes right now. The media has done its job on them!
A recent NBC News/Wall Street Journal poll, found that 62% of respondents said taxes on the rich should go up, and 55% said taxes on corporations should go up. Apparently, these people do not know that the top 20% of US taxpayers pay 83% of all income taxes paid, or that our current corporate tax rate is the highest in the developed world.
In conclusion, when it comes to tax reform, corporate and small-business tax cuts are a win-win. Even the (supposedly nonpartisan) Congressional Budget Office concludes that workers bear as much as 70% of the corporate income tax burden.
Unfortunately, in the coming weeks we will all be bombarded with nonstop propaganda about tax cuts being for "greedy corporations," "fat cats" and "Wall Street.” Don't believe it!
It's rank class warfare, based entirely on progressive lies about the US economy. By supporting corporate and small-business tax cuts that will boost investment, create more and better jobs, and raise average workers' incomes, Americans won't just be cutting taxes for businesses.
They'll be cutting taxes for all of us.
In closing, as I have said recently, President Trump’s comprehensive tax reform plan may well be too big to get passed. If so, he should press hardest for the passage of the reduction in the corporate income tax. That alone should be enough to jump-start the economy.
Lastly, in case you missed it, the recording of our webinar with ZEGA Financial last week is now available. This is one of the most interesting investment strategies I have ever seen. You really should check it out.
Be sure to read the spot-on article by Stephen Moore on cutting the corporate tax rate in the links below.
Wishing you the best,
Gary D. Halbert