How Will Tax Cuts Affect the US Economy and Corporate America?

Bob Doll at Nuveen Investments discusses the likely impact of tax cuts in the US:

Is it even a good idea to enact tax cuts at this point in the economic cycle? After all, growth has picked up, unemployment is at a 17-year low and capacity utilization is high. It’s reasonable to wonder whether tax cuts spur inflation higher rather than boost economic growth. We agree that inflation is likely to move modestly higher next year (more so if tax rates are reduced), but lower tax rates will likely improve productivity and benefit the economy.

Tax cuts are unlikely to have a significant impact on inflation or productivity other than through indirect stimulation of new investment and job creation.

…..If the corporate tax rate is reduced from 35% to 20%, we estimate this would increase S&P 500 earnings-per-share between $12 and $15 annually. Companies could also see an additional boost in the form of earnings repatriation. It’s possible (and even likely) that some companies would use these earnings benefits to lower prices to increase market share, so some gains may be “competed away.” But we think an overall boost in profits and earnings is likely.

That would amount to an annual increase of between 10 and 13 percent in S&P 500 earnings per share (based on a forecast $114.45 EPS for calendar 2017). Companies that invest in building market share would expect a return on that investment by way of increased growth which would still benefit future earnings streams.

Furthermore, if U.S. companies finally bring their overseas earnings home in a tax-effective manner, it’s fair to wonder what they would do with their cash windfalls. Should this happen, we expect increases in balance sheet improvements, more hiring, a rise in capital expenditures, dividend increases, higher levels of share buybacks and an increase in merger and acquisition activity. All of these actions would be a positive for corporate health and equity prices.

I would expect a big increase in stock buybacks as that will boost stock prices and have a direct impact on executive bonuses. Mergers and acquisitions have less certain outcomes and are likely to be secondary, while new investment and job creation will most likely get the short straw.

A Growth Pact for America by Glenn Hubbard | Project Syndicate

Glenn Hubbard, former Chairman of the Council of Economic Advisers under President George W. Bush, and Dean of Columbia Business School proposes:

….two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform. Enactment of these reforms would generate a win for each side – and for both.

But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily. On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures shovel-ready projects and their desirability whether they will meaningfully change the expectations of households and businesses. Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring.

The right, for its part, must rethink its obsession with temporary tax cuts for households or businesses. The impact of such cuts on aggregate demand is almost always modest, and they are poorly suited for shifting expectations for recovery and growth in the post-financial-crisis downturn….

Read more at A Growth Pact for America by Glenn Hubbard – Project Syndicate.

Don’t be fooled: The Republicans are winning | Business Insider

Henry Blodget:

Yesterday, the American government voted to extend almost all of the Bush Tax Cuts permanently. Not temporarily, as a stimulus measure. Permanently.

Read more at DON'T BE FOOLED: The Republicans Are Winning – Business Insider.

‘Doomsday’ For The Fiscal Cliff? | ABC News

Republicans are considering a “Doomsday Plan” if fiscal cliff talks fail. The ABC’s Jon Karl reports:

It’s quite simple: House Republicans would allow a vote on extending the Bush middle class tax cuts (the bill passed in August by the Senate) and offer the president nothing more – no extension of the debt ceiling, nothing on unemployment, nothing on closing loopholes. Congress would recess for the holidays and the president would face a big battle early in the year over the debt ceiling.

Two senior Republican elected officials say this Doomsday Plan is becoming the most likely scenario. A top GOP House leadership aide confirms the plan is under consideration, but says Speaker Boehner has made no decision on whether to pursue it.

Under one variation of the plan, House Republicans would allow a vote on extending only the middle class tax cuts and Republicans, to express disapproval at the failure to extend all tax cuts, would vote “present” on the bill, allowing it to pass entirely on Democratic votes.

By doing this, Republicans avoid taking blame for tax increases on 98 percent of income tax payers. As one senior Republican in Congress told me, “You don’t take a hostage you aren’t willing to shoot.”

This is a time for mending bridges damaged during the election. The ability of the President to unify rather than polarize the two sides of the house will be tested in the next few weeks. Let us hope that he measures up.

via ‘Doomsday’ For The Fiscal Cliff? (The Note) – ABC News.

Fiscal Cliff: Two Candidates, Two Approaches

By ERIC PIANIN and MERRILL GOOZNER, The Fiscal Times

[Romney and Obama] agree that a stopgap measure is needed before January 1 to temporarily extend the raft of Bush era tax cuts and other measures set to expire. However, Obama has signaled his intent to veto even a few months’ extension of tax cuts unless families earning more than $250,000 a year are made to pay higher rates.

……. Romney, Boehner and Senate Republican Leader Mitch McConnell of Kentucky insist that the Bush tax cuts be extended for all Americans, arguing that any increase in rates would discourage investments and job expansion by small businesses. Moreover, Romney has proposed further tax cuts of 20 percent across the board in exchange for capping tax breaks……..

via Fiscal Cliff: Two Candidates, Two Approaches.