Tax Cut Is Better (for Companies) and Worse (for Everyone Else)

President Donald Trump and the Republicans’ tax cut is proving to be vastly more generous for corporate America, and vastly more expensive for taxpayers, than expected. Worse, the Trump Slump is erasing the bump the stock market received from the tax cuts. And evidence is mounting that the promised economic boost isn’t materializing. The administration’s signature political achievement is being eclipsed by disarray over trade, immigration and a government shutdown.

First, the headline number: $600 billion, at least. That’s how much more than expected I estimate the companies in the S&P 500 are on pace to save. It is also how much more the tax cut is likely to add to the national debt if it runs as planned for 10 years. The total savings for all of corporate America will be well into the 13 figures.

Cost Overrun

Trump’s corporate tax cut is now estimated to cost $600 billion more than originally projected

Note: Cost estimate is for S&P 500 companies. Tax savings is the difference between each company’s 2018 tax rate and the average rate it has paid in the past three years, excluding outliers. Q1 to Q3 2018 tax rates are based on actual results; Q4 are estimates. Income growth rates are based on analyst estimates through 2020, and then an assumed 5% growth rate after that.

In late 2017, soon before Congress passed the tax cut — which reduced the U.S. corporate rate to a flat 21 percent from a previous marginal rate that topped out at 35 percent — the Joint Committee on Taxation estimated it would cost $1.4 trillion over 10 years. White House officials criticized that estimate as being too high. In fact, it wasn’t nearly high enough. My current estimate, now that companies have completed 2018, is nearly $2 trillion, and that’s just for the S&P 500. That’s nearly $400 billion more than I calculated in May. And the actual bill could rise even more while the lasting benefits are still pretty questionable.

Corporate profits for the S&P 500 companies did rise nearly 24 percent in 2018, the biggest jump since late 2010. About half of that income growth came not from an improvement in operations but from lower corporate tax bills, according to my math. That was also more than previously expected. Analysts had thought the tax cut would represent only a third of 2018 profit growth. But it appears the the tax cut was either larger than anticipated, didn’t produce as big an economic boost that many said it would, or more likely a combination of the two.

 

 

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