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Trump’s tax plan depends on the growth fairy

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President Donald Trump is sending some of his top economic advisers on the media rounds this morning to defend his recently announced tax plan.

Treasury Secretary Steven Mnuchin told CBS and Fox Business this morning that Trump’s massive tax cut will actually cut the deficit by $1 trillion dollars, by creating an astounding $2 trillion in new revenues through economic growth. Mnuchin seems to suggest the plan will cost $1 trillion, although independent estimates peg the cost as closer to $5 trillion dollars. The administration has not released a detailed enough plan to make an actual estimate.

If this sounds too good to be true, it’s because it is.

Corporations would enjoy a healthy tax cut under the Trump tax plan, slashing the current 35 percent tax rate to 20 percent.Former Goldman Sachs COO and now Chief White House economic adviser, Gary Cohn, however, argues that this is “good for everyday American citizens.” Those who support cutting taxes for corporations believe that it frees up cash spurring more investments and more jobs.

This is the argument candidate-Trump made on the campaign trail to justify slashing corporate taxes last year during the first presidential debate.

“That’s going to be a job creator like we haven’t seen since Ronald Reagan,” Trump said. “It’s going to be a beautiful thing to watch. Companies will come. They will build. They will expand. New companies will start. And I look very, very much forward to doing it.”
There is little evidence to support this argument. The Institute for Policy Studies studied the changes in payroll at 92 publicly held U.S. corporations that were already paying federal income tax of less than 20 percent. (These companies, like many, were able to pay lower than the official 35 percent rate by claiming various exemptions and deductions.) What the study found was that more than half of these companies had actually scrapped jobs during the period when the economy as a whole increased payroll by 6 percent. So what did the corporations do with their tax savings? A majority of the companies in the study bought stock in their own companies in order to boost their company’s shares. This kind of activity benefits wealthy investor but has an extremely modest impact on actual economic growth.
This pattern is also confirmed in a 2011 Senate report, that saw many big tech companies actually shed jobs when enticed to repatriate their overseas cash holdings with a generous a tax holiday. According to the report, Hewlett Packard shed 8,000 US jobs and IBM shed 12,000.

Most economists no longer see tax cuts for corporations as a particularly effective way to spur economic growth. Corporate tax cuts might have been beneficial to President Reagan’s economy, but for Trump, an economy rife with start-ups means corporations are more likely to invest in research and automation to stay competitive: two measures that do not generally promote job growth.

Former Goldman Sachs COO and now Chief White House economic adviser, Gary Cohn told both Good Morning America and CNBC that the “wealthy are not getting a tax cut under [their] plan,” but they are, thanks to tax cuts for the top income tax bracket and the elimination of tax measures like the estate tax and the alternative minimum tax, both of which will end up putting more money in the pockets of the wealthiest Americans.

Tax cuts for the wealthy tend to spur less growth than those targeted toward the poor or middle class, who will quickly spend new income. The situation is even worse if tax cuts directed toward the rich are paired with cuts in public spending that help the working class, which is exactly what Trump is proposing.

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