Tax Cuts Do Boost Large and Small Business Investment
$DIA, $SPY, $QQQ, $VXX
Fact: Lower corporate tax rates will lead to more investment projects and thus more aggregate economic activity.
When companies, big and small, have more “free cash” at hand, they tend to invest more, and this effect is distinct from any effect of the tax cut on expected rates of return.
So when critics call the corporate rate cut a “giveaway” to business, that is precisely the mechanism that tends to boost investment.
While these investment boosts are strongest for companies that are cash constrained, they also seem to occur for the companies that have a lot of cash on hand, as is often the case with today’s profitable corporations.
These results have held up in studies.
So, for all the talk about the Republicans not being an “evidence-based” party, in this particular debate they seem to have the science on their side.
A related worry is that companies will take their cash windfalls and simply return them to investors in the form of dividends and cash buybacks.
1st, the evidence doesn’t support this fear.
When all variables are measured properly, it seems major companies are paying out to shareholders about 22% of their net income. It is therefore unlikely that new profit, as might follow from lower corporate tax rates, will simply be drained out of the corporation.
Generally, sending money back to investors does not have to mean no new investment.
The Big Q: What if those investors take the money and put it in a venture capital fund or invest it in some other manner?
The Big A: The point of capital markets is to recycle resources into the most profitable new opportunities, and that may or may not involve the companies that initially earned those profits.
Note: Not all past Winner, will be future Winners.
Gary Cohn, President Donald Trump’s chief economic adviser, spoke to a group of CEO,s and asked how many of them would increase investment if the corporate tax cut goes through.
The resulting show of hands was underwhelming, and many critics have seized on this episode as a “gotcha” against the tax plans. That is the wrong conclusion to draw.
The 1st and most general reply is that asking business people is not our best or most reliable source of information about policies.
For instance, business people often believe, and will testify accordingly, that increases in the minimum wage will boost unemployment significantly. There is an extensive debate in the economics profession about this question, but the testimony of business people is hardly taken to be decisive, even though they are the ones doing the hiring.
When the at large critics allege that corporate tax rate cuts will not boost investment, that is going against economics 101.
Friday, the US major stock market indexes finished at: DJIA -100.12 at 23358.24, NAS Comp -10.50 at 6782.80, S&P 500 -6.79 at 2578.85
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Have a terrific weekend.