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Economist Takes Deep Dive Into The Effects Of Slashing Corporate Taxes


As we just heard there, the Republican argument behind a very large and permanent corporate tax cut rests on the idea that it will spur investment and that in turn would boost the economy. But something awkward happened when White House economic adviser Gary Cohn appeared before CEOs at a Wall Street Journal event this week. The CEOs were asked to raise a hand if they would in fact increase investment if they got a big corporate tax cut. Only a few hands went up, prompting this reaction from Cohn.


GARY COHN: Why aren't the other hands up?

HU: Why aren't the other hands up, he says. Well, we put that question to Kimberly Clausing. She's an economist at Reed College who studies the impact of tax cuts on economic growth.

KIMBERLY CLAUSING: A lot of what's holding back investment right now has nothing to do with a scarcity of after-tax profits. In fact, if you look at multinational firms, most of them have record-high after-tax profits compared to earlier years or earlier decades. Instead, what seems to be holding back investment is lack of good investment opportunities.

So for instance, if the middle class is struggling, that gives you fewer items that you could sell to the middle class and then less incentive to invest in factories to make those items. So I think most companies are not so much wanting for funds but wanting for things to invest in.

HU: So if not a corporate tax cut as proposed, what would actually encourage new investments that you're talking about?

CLAUSING: Yeah. I think what's interesting here is that if you look at the people who are marketing this tax plan, they're often marketing it as if it will help workers through a sort of a trickle-down mechanism. But if you went straight to the workers instead and gave them benefits from the tax cut - whatever tax cut you're going to have - that's I think more likely to trickle up and help corporate America by giving the middle class more money to spend on goods and services and by making those investments worthy opportunities for firms.

HU: In terms of this current version of the overhaul as proposed in the House and Senate, if businesses get this cut, how do you think they would actually behave differently?

CLAUSING: Yeah. I don't think there's going to be a big investment nirvana or big effects on workers through this. I think what's really going to happen is this bill is going to enrich those at the top of the distribution. It's a big gain to people who've already made investments.

For instance, there are $3 trillion worth of offshore earnings that are going to be favorably taxed, and this is a huge windfall to those people who've aggressively moved income offshore in the past. The corporate rate itself is coming down a lot, and that also helps old capital investments that have already been made. So this is really of great benefit to the shareholders of America.

HU: You mentioned the winners there. Who loses out if these passed?

CLAUSING: The losers I would say are the middle-class Americans who will pay the future taxes due to these deficits. So there's about $1 and a half trillion worth of deficits, and those will eventually have to be paid for. There's also another group of people who lose, which are those who rely on either Medicare because there may be mandatory Medicare cuts in the wake of these deficits as soon as next year.

And also, the combination of the individual mandate repeal and the Senate bill will also both cause some people to lose insurance because they'll choose not to insure and raise premiums for those who are left in the insurance pool. And the Congressional Budget Office estimates that as many as 13 million people will be at risk of losing insurance under the Senate bill.

HU: That's Reed College professor Kimberly Clausing. Kimberly, thanks for joining us.

CLAUSING: Thank you.

(SOUNDBITE OF THE BLOW'S "TRUE AFFECTION") Transcript provided by NPR, Copyright NPR.

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