Tax Cuts

White House economist: Middle class will benefit from business tax cuts in 3 to 5 years

 By Rick Newman

A recent study from the White House claims that slashing the corporate tax rate would boost middle class incomes by somewhere at least $4,000 per year. But there’s a catch: it would take a while.

“This is the disappointing answer in terms of timing,” Kevin Hassett, chairman of the White House Council of Economic Advisers, said at the Yahoo Finance All-Markets Summit on October 25. “If you go to the optimistic side of the literature, it could take 3 to 5 years. If you go to the pessimistic side, it would about double that.”

Hasset’s paper makes a fairly intuitive argument: Lowering the corporate tax rate from 35%, the current rate, to 20%, which is President Trump’s target, would lure more businesses to America, generate more economic activity, and increase demand for workers, which would push wages up. But the paper doesn’t say how long it might take for this process to play out, which is what Hassett elaborated on at the Yahoo Finance summit.

“Firms are going to say, ‘Oh geez, we should go to the United States and locate our plants here,’ ” Hassett told Yahoo Finance. “But it takes a while for the machines to get nailed down and plugged in, the jobs to be listed online, people to apply and so on. That process takes a little bit of time.”

Hassett’s paper has drawn criticism from prominent economists such as Larry Summers and Jason Furman, who both worked in the Obama administration. But economists who have worked in Republican administrations support it, including Greg Mankiw and Casey Mulligan. The new caveat about the lag between tax cuts on businesses and benefits enjoyed by middle-class workers may actually improve the credibility of the CEA analysis, since it acknowledges that corporate tax cuts are not a magic formula that would push incomes up overnight.

But it’s politically problematic, because corporations would enjoy lower taxes and higher profits right away, while ordinary workers waited for the benefits to reach them. Hassett’s best-case scenario—a three-year lag—would span at least two election cycles. If corporate tax cuts went into effect in 2018, ordinary folks wouldn’t benefit until at least 2021. Republicans, meanwhile, would have to campaign for the 2018 midterms and the 2020 presidential election by promising that the tax relief already enjoyed by businesses will soon reach regular families.

Individual tax rates

Cutting individual tax rates could offer a different form of relief for middle- and lower-income families, one they feel much sooner. During a different session at the Yahoo Finance summit, Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, predicted that the tax reform bill Congress eventually passes will go into effect as of January 1, 2018 (even if it must be retroactive) and push rates down for most taxpayers right away. That means the amount of tax withheld from paychecks would go down and take-home pay would go up—well before voters hit the polls next November.

Still, many economists argue that it’s the business tax code, rather than the individual side, that is in most need of repair. That’s because the US corporate rate of 35% is the highest among advanced economies, yet tax breaks and loopholes push the actual tax paid far lower than 35%. For most companies, the CEA paper is an attempt to link cuts in the corporate rate to the well-being of ordinary Americans. Expect the debate over that to intensify.