The Tax Bill and Extreme Hyperbole

The Republican and Democratic members of Congress have their marching orders from which there is to be no deviation. From the Republicans, we are told to hold on to our hats because the economy is about to take off as never before and every boat will rise and every family will get to keep more of what they earn. From the Democrats—Armageddon, an outright fleecing of the middle class by big fat corporate America.

Shame on both their Houses, but considerably more shame on the Democrats. Democratic Party discipline has been over-the-top impressive. Either call the Republican Tax Bill grand larceny committed against the middle class or forget any worthwhile committee assignment and maybe expect to be “primaried” next Fall.  The Democrats have been frantically trying to outdo one another lamenting the tax plague about to befall the middle class.  The left-leaning media have been singing from the same songbook.  We’ll see. It is a huge gamble. They are betting their noise will overshadow the increased money that will begin showing up in millions of middle-class paychecks in February.  We doubt the gamble will pay off. Once the hyperbole dies down, over 90% of middle-income taxpayers will see a significant bump in their take-home pay, averaging over $1,000.  We’ll be surprised if the negative poll numbers regarding the tax bill, which is really driven by the unremitting negative drum beat the Democrats are pounding out, will hold.

Now, the Republicans have done their share of hyperventilating as well. They have wagered, big time, on a dramatic goose to the economy as a result of a grand largess to the business sector. We would describe this as the world’s longest “Hail Mary” pass, but, perhaps, well worth the attempt. Past history, however, suggests caution in assuming how much of that corporate largess will actually filter through the economy, but we’ve never seen such a large potential infusion of tax-driven earnings before. Somewhere between $1 trillion and $4 trillion could come home from abroad because of the one-time deep “discount” in repatriation tax. Furthermore, the expensing of capital investments in the year investments are made will add billions to corporate earnings. And, finally, we have the reduction of Corporate tax rates (something Democrats have always supported until a guy named Trump actually did it) from 35% to 21 %.

Disingenuous leftist politicians and commentators who really know better, are all singing the same chorus. “No one pays the 35% corporate rate to begin with,” they tell us. Well, fair enough, but nearly all industries and most major companies pay a lot more than the new 21% corporate tax rate.  For example, the retail industry pays an effective rate of over 30%, Engineering and Construction nearly 30%, Automotive nearly 28%, manufacturing, and Metals over 26%, Chemicals nearly 26%, Technology over 25%, Pharmaceuticals nearly 25%, and Aerospace over 23%. Collectively, billions of dollars freed up for expansion and growth.

Many companies have made firm commitments regarding an immediate infusion of money into employee paychecks and/or bonuses. We suspect a good bit of arm-squeezing by the Administration, but who cares?

Already, AT&T has committed to paying a $1,000 bonus to over 200,000 non-management employees, and to begin a $1 billion capital investment program in the United States. Not to be outdone, Comcast immediately announced that it would match the AT&T bonus by extending the same amount to 100,000 of its non-management employees. The major banks including Fifth Third Bancorp and Wells Fargo have announced similar substantial pass-throughs to their employees. Boeing also announced that it was allocating $300 million to employee-related benefits (whatever that means).

Actually, we believe employees should derive financial reward primarily from the growth of the companies for which they work. The primary purpose of profit is (or should be) to fund growth, and when companies grow their employees should benefit accordingly. In fact, corporate growth is the best means of securing rising wages for corporate employees. Indeed, economic growth—strong national economic growth is the only elixir that really pulls workers out of stagnant income growth.  It is, when all is said and done, the real remedy for poverty.

The Republicans have risked inflating expectations, but nearly all tax-payers will get to keep more of what they earn, and that’s a good thing. Whether the large corporate tax breaks will filter down into the rest of the economy remains to be seen, but there is plenty of reason to assume a positive economic impact. The fact that individual benefits lapse at ten years, in order to keep within the arcane Senate rules of reconciliation, probably ensures that we’ll see new tax legislation a decade from now. Meanwhile, ten years of tax relief isn’t a bad thing.

We don’t expect the elimination of the Obamacare mandate to have the draconian impact on health care that many predict. The fact is that nearly everyone who was taxed or penalized under the Affordable Care Act were poor and those who could least afford to be penalized (or taxed). Notwithstanding the elimination of the mandate, an additional eight million people have just signed up for health insurance.

So, let’s all take a deep breath and hope the tax bill produces the economic benefits that its proponents expect.  And let’s be truly impatient and resentful of politicians and commentators who hope with all their heart that it fails.