by Patrick Gallagher

August 30, 2017

If you are hoping tax reform legislation will salvage the Trump administration’s agenda and support another stock market run-up, don’t count on it. Amidst internal dissension and growing concern that now is not the time for tax cuts, the administration and congressional Republicans are struggling to shape a bill that can garner enough votes—and the president’s approval.

After the failure to repeal Obamacare, Republicans see tax reform as the only route to a major legislative victory this year. Cutting taxes, after all, is what Republicans believe they do best. But this could end up like the failed repeal all over again—patching pieces together to find something that will pass that doesn’t really address the underlying problems.

As CNBC commentator Ron Insana wrote recently, “Tax reform is a great idea, but tax cuts just might be a waste of money.”

Republican House leaders kicked off their campaign in mid-August at the Reagan Ranch in California “to conjure up the same momentum that led to the 1986 tax overhaul under President Reagan,” wrote the Los Angeles Times.

And therein lies the problem: It’s not 1986 anymore.

When Ronald Reagan entered office in 1980, the corporate tax rate was 46 percent and the top individual tax rate was 70 percent. When he left, the corporate rate had been slashed to 34 percent, the top individual rate was down to 28 percent, and some meaningful tax code reform had been achieved.

Those were huge tax cuts, and they did spur the economy and extended the bull market that had begun in 1983.

But back then, swaths of tax shelters and loopholes were available for elimination, tax specialist Michael J. Graetz told the New York Times recently. Today, he said, “there’s no pot of gold to pay for the cuts the way there was back in 1986.”

Further, the Times reported, “Even though it nominally cut corporate rates, the 1986 act actually shifted much of the tax burden from individuals to corporations. That’s not feasible today, where lowering the tax burden on corporations is a major goal.”

Supply-side economic theory worked in 1986 because taxes and interest rates were high, the U.S. dollar was strong, and capital was tight.

Almost none of that applies today. Interest rates remain near historically low levels. Unemployment is low, employers say they can’t find qualified workers, and the world is awash in capital. There can’t be many major corporate investments that are on hold due to a lack of capital.

Despite high-level talking points about “helping average families and keeping jobs in the United States,” the current tax initiative is primarily about a corporate tax cut and a tax repatriation holiday to incentivize multinational companies to bring back much of the estimated $2.6 trillion of profits they are holding overseas to avoid paying the 35 percent tax.

Companies will use the cash primarily for dividend increases, stock buybacks, and mergers & acquisitions, not new factories and job creation. That could prove a boost for stocks—if the market hasn’t already factored it in—but it’s hard to see this doing much for average families or the overall economy.

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