December 20, 2017 / 7:48 PM / a year ago

Breakingviews - How to know if America’s big tax bet pays off

The dome of the U.S. Capitol Building is reflected in a puddle on a rainy morning in Washington February 2, 2012. REUTERS/Kevin Lamarque

WASHINGTON (Reuters Breakingviews) - The U.S. tax reforms passed by Congress on Wednesday are effectively a giant bet that benefits given to companies and the wealthy will trickle down to average workers. That makes them a big risk for the Republicans who control Congress. Here are five factors to measure the policy’s success.

INEQUALITY: Republicans have done a bad job selling their plan to the public, with 55 percent of Americans opposing it, according to a CNN poll. The top 5 percent of income earners would see the biggest cuts, the Tax Policy Center said. Republicans risk the biggest backlash on this front, with reductions in tax breaks like state and local deductions hitting average Americans. Any sign that the tax bill has worsened rather than eased inequity will hand a stick with which Democrats can thwack Republicans in 2018’s mid-term elections.

WAGES: Pay increases have been disappointing given the low 4.1 percent level of unemployment. The White House’s Council of Economic Advisers say a corporate tax rate of 20 percent – just below the 21 percent on which Congress settled – would result in an average annual income increase of at least $4,000 at the end of 10 years. A visible rise in wages would be a positive effect of the tax bill. Yet it’s also one of the most dubious projections, since companies will be under pressure to share earnings gains with shareholders too.

STOCK MARKET: One of President Donald Trump’s most common brags is on the rise of markets. On Tuesday, Trump tweeted “DOW RISES 5000 POINTS ON THE YEAR FOR THE FIRST TIME EVER.” Tax cuts will probably send markets even higher – and are most likely one reason valuations are already so lofty – but since it suggests investors think higher earnings will flow to the bottom line rather than being paid out to workers, it’s perhaps not such an encouraging sign.

CAPITAL INVESTMENT: Non-residential business investment has improved after being sluggish or negative over the last two years. Spending on equipment went up by 10.4 percent in the third quarter, the fastest pace in three years. But the type of investment is important. An increase will really only matter if it helps boost sluggish productivity.

GDP GROWTH: Trump predicted tax cuts would turbocharge the economy to a 6 percent growth rate, compared to the 3.3 percent annualized expansion in the third quarter. The nonpartisan congressional Joint Committee on Taxation estimated an earlier Senate tax plan would add 0.8 percent to GDP over a decade. Trump’s estimate is unrealistic but a modest lift is expected. Still, the tax plan won’t pay for itself, as the White House contends, and may add $1.5 trillion to the deficit over 10 years. That trade-off may be this tax bill’s biggest legacy.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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