With Republicans in both chambers of Congress pushing their own tax bills, Treasury Secretary Steven Mnuchin said a primary goal of tax reform, and particularly cutting corporate taxes, is to help American workers.
“This is as much about bringing jobs back to America as anything else,” Mnuchin told Yahoo Finance in an interview in New York on Thursday.
‘A huge incentive to invest money here at home’
In his interview with Yahoo Finance, Mnuchin said lowering the corporate tax rate from 35% to 20% would benefit workers by boosting hiring, wages and investment.
Mnuchin cited analysis from the Council of Economic Advisers, which notes that workers bear 70% of the burden of corporate taxes. But the author of that analysis, Kevin Hassett, told Yahoo Finance it could take at least three to five years to get to the middle class and workers. Meanwhile, there is economic literature disputing the assertion that reducing the corporate tax burden helps the middle class. That includes a 2012 Office of Tax Analysis paper that shareholders pay over 80% of corporate tax while workers pay just 18%; the Treasury Department removed that paper from its website.
Still, Mnuchin says he is convinced that corporate tax cuts and repatriation would spur investment.
“This tax system will bring back trillions of dollars that will be invested here combined with expensing for five years gives a huge incentive,” he said. “The lower corporate rate combined with expensing gives a huge incentive to invest money here at home.”
Despite what Mnuchin says, during the last repatriation event in 2004 companies used much of the of cash returned onshore for buybacks. And a study conducted by Bank of America Merrill Lynch found that companies would be inclined to take repatriated earnings and use them to pay down debt and buy back shares.
Mnuchin: Growth will pay for the deficit increase
With debt to GDP over 75%, concerns are mounting about the US deficit, particularly with entitlement programs like Social Security at stake. But Mnuchin insists growth will offset any concerns about tax cuts increasing the deficit.
“As you’ve heard us say, we think there will be significant growth. We think there’ll be $2 trillion of growth,” Mnuchin said. “But even if you think there’s only 40 basis points improvement in GDP, you get to break even. So we do think these tax cuts will pay for themselves.”
This comes despite estimates for a rising deficit put out by the nonpartisan Tax Policy Center and the Joint Committee on Taxation while most economists question the ability for tax cuts to boost growth. In fact, past tax cuts haven’t. President Ronald Reagan’s 1981 tax cuts added so much to the deficit, they had to be reversed. And President George W. Bush’s tax cuts in 2001 and 2003 failed to produce growth.
Questions on the middle class focus
The Republicans have insisted they want to make the tax code simpler and more efficient, with one example being doubling the standard deduction. But some say they are still picking winners and losers. For example, the current House proposal takes away the deductibility of student loan interest and major medical expenses without fully eliminating carried interest loopholes.
Mnuchin insisted it’s about the middle class.
“It is about simplicity and significant tax cuts,” he told Yahoo Finance. “A typical … person would have about a $1,000 tax cut.”
As for the proposed estate tax repeal, Mnuchin said Republicans think it’s an unfair tax because it’s a double tax and also focuses mostly on small businesses.
“This is as much a philosophical issue as it is an economic issue. And again the estate tax is under consideration,” Mnuchin said. Still, Mnuchin conceded at the Institution for International Finance Conference last month that cutting the estate tax disproportionately helps rich people.
The Tax Policy Center estimates that only about 80 farms and closely-held businesses are expected to pay the estate tax this year. Furthermore, they estimate only about 5,000 families are expected to pay the estate tax, and the first $5.49 million for individuals and $11 million for couples are not taxed.
Meanwhile, the logic of “double tax” is specious as right now assets are now passed on in a stepped-up basis. For example, if someone dies with a $100 million stock portfolio that had a $10 million cost basis, the cost basis gets stepped up to $100 million (time of death) for heirs, meaning the capital gains aren’t taxed.
This is significant, as repealing the estate tax would further increase the deficit. (The estate tax amounts to $200 billion revenue over 10 years, according to the Tax Policy Center.)
While the proposals work their way through Congress, Mnuchin said the market does have expectations for passage.
“There’s no question the market likes the Trump economic policies,” he told Yahoo Finance. “There’s no question in my mind there are expectations of tax reform built into the market…My guess is there’s still upside….People will still continue to invest. And that’s going to be good for American companies.”
Nicole Sinclair is markets correspondent at Yahoo Finance
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