Top White House economic adviser Gary Cohn’s background as a Goldman Sachs executive leaves him more experienced in the art of talking to really rich people than communicating with the public. That ends up making this interview with CNBC’s John Harwood, published this morning, an extraordinary document, because when Harwood pushes him on a few points, Cohn ends up basically surrendering and admitting the plain truth about the Republican tax plan: that it’s a bonanza for big businesses and the rich, whose main benefit for normal people is a vague hope that prosperity will trickle down from those at the top.
Cohn has been deeply involved in crafting the plan from the White House end, and the regressive nature of the plan both fits Cohn’s background as a rich business guy and the sincere convictions of conservative tax wonks. But experienced political operatives know you’re supposed to say your plans are all about the middle class.
Cohn, by contrast, is so new at this that he winds up actually saying “the most excited group out there are big CEOs, about our tax plan.”
And he’s right — this plan is great for big CEOs!
Why big CEOs love the GOP tax plan
The Republican tax plan offers multiple benefits to Cohn’s “big CEOs”:
- It reduces the corporate income tax rate, which boosts corporate profits and therefore share prices. Since most CEOs’ compensation is linked to share price performance, that means CEOs benefit directly.
- It lets companies take cash that’s been stashed tax-free in foreign subsidiaries and use it for dividends or buybacks that also boost share prices.
- The changes to the rate structure mean that very high-income people will pay lower income taxes.
- Repealing the estate tax helps you if you manage to amass an $11 million fortune, which big CEOs tend to do but family farmers don’t.
None of this, however, helps a normal person. But Cohn has an answer: The money will trickle down.
“We see the whole trickle-down through the economy”
Cohn is so new to this that he doesn’t seem to realize “trickle down” is a pejorative phrase and literally uses it to describe the plan — big CEOs get a tax cut, and that creates indirect benefits for American workers (emphasis mine):
When you take a corporate tax rate at 35 percent and move it to 20 percent, and you see what's happened over the last two decades to businesses migrating out of the United States, migrating profits out of the United States, migrating domicile out of the United States, and hiring workers out of the United States, it's hard for me to not imagine that they're not going to bring businesses back to the United States.
We create wage inflation, which means the workers get paid more; the workers have more disposable income, the workers spend more. And we see the whole trickle-down through the economy, and that's good for the economy.
Earlier in the interview, however, Cohn was describing his past experience working on corporate tax avoidance from the investment banking side. And in doing so, he ends up implicitly explaining why trickle-down won’t work. Tax avoidance schemes involve shifting money around on paper, not shifting real economic activity:
Look, a year ago, I was on the other side of this equation. I was advising companies how to get out of the burdensome US tax system. We were talking about inversions — we were talking about moving companies out of the United States. The most compelling presentation I could make to a board is, hey, I can turbocharge your earnings without doing anything in your company. I can just relocate your domicile, and you can hold your board meetings, you can do a few things, and you can go from a 35 percent tax rate to a 15 percent tax rate. You can deliver 20 percent of your earnings to the bottom line.
At another point, Cohn takes another run at developing an argument as to why a big corporate tax cut will help workers.
“People have trapped their money offshore,” Cohn explains. “So you can't pay US workers. You can pay non-US workers, 'cause you've got the money offshore.”
Harwood points out that this is not accurate, and then Cohn doesn’t challenge him on the facts, simply restating that CEOs are excited about the plan:
HARWOOD: Don't businesses have a ton of domestic cash?
COHN: Well, they borrow money at home to expand if they want to expand at home, but their real earnings are trapped offshore. If companies were making that money onshore, they'd be paying their labor, they'd be paying their workers more money. So our biggest supporters are really the Business Roundtable. When you talk to all the CEOs — they're the most excited about this.
The reality is there is nothing stopping CEOs from hiring workers. What repatriation rules stop CEOs from doing is using cash to conduct share buybacks. Buybacks raise share prices and, thus, CEOs’ earnings. So, again, CEOs really do have reason to be excited about this plan. As Cohn says, the biggest supporters of the tax plan are really the Business Roundtable — a consortium of rich CEOs.
Everyone else is left to hope for the best.