Gary Cohn, the top White House economic advisor, was onstage making the Trump administration's case that a huge cut in corporate taxes would trigger a surge of business investments.
Then came an off-the-cuff question to business leaders listening to Cohn at the Wall Street Journal CEO Council meeting last week: How many will increase investments if the Republican tax plan is enacted?
TV coverage showed about three dozen executives sitting near the stage. Only three of them appeared to raise their hands. An incredulous Cohn responded: "Why aren't the other hands up?"
A video clip of that moment, which has become popular viewing in Washington, illustrates what many economists regard as a flaw in the administration's main selling point for the Republican tax proposal: the argument that a dramatic cut in the U.S. corporate tax rate will be a boon to America's middle class.
The White House Council of Economic Advisers promises that the corporate tax cut, to 20% from 35%, would lead to an increase of at least $4,000 a year in average household income.
But that calculation depends on an assumption that workers would get a much bigger cut of the corporate tax savings than most economic studies — including those by the Treasury Department and Congressional Budget Office — have shown.
Most economists agree that the Republican tax plan will boost business investments. And that should lead to more hiring, greater productivity and increased company profits that would, in theory, prompt employers to raise wages.
In today's economy, however, experts said it's unrealistic to expect the kind of investment bonanza that proponents of the tax plan are banking on.
One of the key drivers of investment is access to money, which hasn't been a problem for most businesses. Large companies, in particular, already have plenty of cash. Borrowing costs are historically very low.
AT&T Inc. this month promised to increase its U.S. investment by $1 billion next year — or about 4.5% of the company's capital spending this year — if a tax overhaul with a 20% corporate rate is signed into law. But other CEOs, as they were at the Washington forum, have been less enthusiastic about increased spending.
"If you wave a wand and say tax reform is done, and our … taxes decline by a certain amount, I don't think that, by itself, is going to change our capital availability," Arne M. Sorenson, chief executive of hotel chain Marriott International, said during an earnings call this month.
Those plans could change in the longer run, he said, but for the near term, the savings are "probably likely to go back to shareholders."
That's in line with the preponderance of economic research, which suggests most of the benefits of corporate tax cuts end up flowing to shareholders through stock buybacks or increased dividends and not to increasing the pay of ordinary workers.
It takes awhile — many years, by some accounts — before the gains from the tax cuts would work their way down to the average American.
"It's a fantastically poorly targeted way of delivering a middle-class tax cut," said Edward Kleinbard, a USC professor and former chief of staff to Congress' Joint Committee on Taxation.
Kevin Hassett, chairman of the White House Council of Economic Advisers, acknowledged that it optimistically could be three to five years before the average household could get the $4,000 to $9,000 annual boost in income that his study estimated.
"If you go to the pessimistic side … it would be about double that" amount of time, Hassett told a Yahoo Finance All-Markets Summit last month.
Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, reckoned it would be more like 10 to 20 years. And he said it was misleading for administration officials like White House Press Secretary Sarah Huckabee Sanders to be tweeting out: "What would your family do w/ a $4,000 raise from the President's tax cut plan?"
"It's foolishness, complete foolishness," Rosenthal said.
It's widely believed that the corporate tax cut, plus allowing for immediate, full deduction on investments, would spur some companies to spend more on capital expenditures — land, buildings and equipment. That spending has been disappointingly slow over the last decade, although it has picked up this year.
The nonpartisan Tax Foundation estimated that the Senate bill, including changes in individual income taxes, would boost wages in the long run by 2.9% and generate an additional $1.3 trillion in tax revenue over 10 years. That would reduce the estimated increase in the federal budget deficit over 10 years to around $500 billion.
But economists agree there's little evidence to support the idea that the lost revenue from tax cuts is offset by the additional economic growth they produce. Most analysts' calculations have concluded that the Republican plan would result in a much bigger hit to the federal budget, closer to $1.5 trillion over a decade, exacerbating the federal debt and leading to increased government borrowing and interest payments. That in turn would push up interest rates more broadly, and reduce the investment and economic gains otherwise expected from lower taxes.
There are additional financial consequences down the road, said Joel Slemrod, a University of Michigan economics professor who specializes in tax policy.
"If you increase the deficit by a trillion and a half [dollars] over 10 years, that doesn't make the burden of taxation go down," he said. "It just pushes how we allocate the tax burden for 10 years onto future generations."
Congressional Republicans are aiming to pass a tax overhaul before year's end. A 20% corporate tax rate would be the lowest level since 1939. Cutting the rate to that level is such a priority that, in order to make it permanent and avoid violating budget rules, the Senate Republican bill calls for individual tax cuts to expire in 2026.
Employee wages and compensation as a share of the overall U.S. economy have been trending down since 1970. They reached an all-time low in 2013 before recovering somewhat the last few years. Average hourly earnings have been stuck at a measly 2.5% annual rate in recent years, despite the very low unemployment.
At the same time, after-tax corporate profits are at a historically high level as a share of the economy, although down from a record reached in 2012.
"That says all these companies have figured out other ways — whether it's offshoring or outsourcing to independent contractors — of making money without really having productive workers to get there," said Harry Holzer, a public policy professor at Georgetown University. "I don't think [workers] should expect too much."
The House and Senate Republican tax bills also eliminate most U.S. taxes on foreign earnings, another change long sought by corporations that supporters say would keep jobs and investment from flowing to other countries. Economists agree that some of the shortfall in domestic business spending stems from firms choosing to invest overseas, where in many places the operating costs, and taxes, are lower.
Hassett said that by cutting the rate to 20% and adding proposed reforms to keep companies from shifting profits overseas "the people who will benefit will be the workers here in the U.S. who have increased demand for their jobs."
He downplayed the tepid response to the investment question from CEOs at the recent Washington forum, telling reporters later that corporate executives tend to say in surveys that they won't change their behavior if tax changes are made.
Hassett noted that CEOs have a responsibility to shareholders to respond to tax changes, and he thinks the large corporate tax cut will lead to new investment.
But Sen. Ron Wyden (D-Ore.), the top Democrat on the Senate Finance Committee, said the corporate chief executives should be taken at their word on whether they will put the tax savings into higher wages.
"We all watched on TV … that virtually nobody raised their hands," Wyden said as the committee debated the tax bill this month. "And the reason why is because the multinationals are awash in cash. And we've been listening to investor calls, and they said they'd be using the tax breaks in order to help shareholders and the like."