One of the key claims made by supporters of the GOP tax overhaul is that the new tax rules will boost domestic investment significantly. Kevin Hassett, chair of the president’s Council of Economic Advisers, has argued that lower corporate tax rates coupled with the repatriation of profits held overseas will result in an investment boom by U.S. businesses, raising economic growth and, eventually, workers’ paychecks.
But Renu Zaretsky of the Tax Policy Center says that domestic investment in the U.S may fall short of what the overhaul’s backers are hoping for, citing five reasons:
1. Overseas investment are still attractive: U.S. companies still have plenty of reasons to invest outside of the country, since foreign profits are taxed at a lower rate.
2. Domestic demand is unlikely to increase significantly: This is a basic point many economists have made. U.S. companies will invest more in domestic production only if they see rising demand. There is little evidence of that at present, and many businesses are dogged by weak sales.
3. Higher interest rates reduce investment: Interest rates are rising rapidly — the 10-year Treasury yield climbed past 2.8 percent this week — due to inflation fears and the big jump in projected government borrowing driven by the tax cuts. Higher borrowing costs change the calculus on new investments for the worse.
4. Profitable investments are already lacking: Some tech giants have been sitting on huge piles of cash for years, and there’s no indication they have suddenly found productive new uses for that cash in the U.S.
5. Accounting rules: Tax rules such as those for depreciation can drive investment decisions, but many business managers pay at least as much attention to accounting rules, which can produce different outcomes. Zaretsky cites a Federal Reserve Board economist who found that because of accounting rules, changes in the “corporate income tax could create smaller distortions to investment decisions than we would otherwise estimate.”