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Cut corporate taxes to boost investment and wages? - BBH

"Reports suggest that the US Congress is making progress toward tax reform.  The House of Representatives is still slated to vote on its version tomorrow.  It appears likely to pass," BBH analysts note.

Key quotes

The Senate version will be marked up in committee this week.  The latest revisions include repealing the individual insurance mandate and ending the middle class and small business tax break after 10 years to reduce the long-term costs while keeping the corporate tax cut permanent.    

Some proponents of the corporate tax cut argue that the fewer businesses are paying to the Internal Revenue Service, the more money is available for wages.   The assertion that a corporate tax cut to 20% will boost typical household income by $3-$7k has been refuted by many economists, but it also does not pass the smell test.  An online poll conducted for the NY Times found 78% of the respondents did not expect that they would receive a raise if their employer got a tax cut.    

To be sure, this is not a partisan claim.  The survey found 70% of self-identified Republicans and 65% who said they strongly approve President Trump's performance recognized that corporate tax cuts are unlikely to trickle down to higher wages.  

 There may be other reasons that some may support the corporate tax cuts, but spurring investment and wage growth are not compelling or convincing arguments.  The kind of investment that may be more necessary, and can boost wages and productivity is public investment, but the tax reform proposals will leave little room for an infrastructure initiative. 

Although the equity market advance appears to be largely explained by rising earnings, some expectation for tax cuts may have also lent support.  During period of Fed tightening, it is not unusual for the yield curve to flatten.   Tax  reform could help counter the flattening, but with around $11 trillion of negative yielding debt (in Europe and Asia), and the US the only major center that the supply of new bonds will outstrip the demand from the central bank, the demand for the long-end of the curve may not slacken much, while the short-end is anchored by Fed expectations.

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