(Bloomberg Opinion) -- President Donald Trump and the Republicans’ tax cut is proving to be vastly more generous for corporate America, and vastly more expensive for taxpayers, than expected. Worse, the Trump Slump is erasing the bump the stock market received from the tax cuts. And evidence is mounting that the promised economic boost isn’t materializing. The administration’s signature political achievement is being eclipsed by disarray over trade, immigration and a government shutdown.
First, the headline number: $600 billion, at least. That’s how much more than expected I estimate the companies in the S&P 500 are on pace to save. It is also how much more the tax cut is likely to add to the national debt if it runs as planned for 10 years. The total savings for all of corporate America will be well into the 13 figures.
In late 2017, soon before Congress passed the tax cut — which reduced the U.S. corporate rate to a flat 21 percent from a previous marginal rate that topped out at 35 percent — the Joint Committee on Taxation estimated it would cost $1.4 trillion over 10 years. White House officials criticized that estimate as being too high. In fact, it wasn’t nearly high enough. My current estimate, now that companies have completed 2018, is nearly $2 trillion, and that’s just for the S&P 500. That’s nearly $400 billion more than I calculated in May. And the actual bill could rise even more while the lasting benefits are still pretty questionable.
Corporate profits for the S&P 500 companies did rise nearly 24 percent in 2018, the biggest jump since late 2010. About half of that income growth came not from an improvement in operations but from lower corporate tax bills, according to my math. That was also more than previously expected. Analysts had thought the tax cut would represent only a third of 2018 profit growth. But it appears the the tax cut was either larger than anticipated, didn’t produce as big an economic boost that many said it would, or more likely a combination of the two.
As I did in May, I calculated how much the tax plan lowered corporate America’s tax bill and boosted its profits by looking at the corporate tax provision that companies in the S&P 500 reported for the first nine months of 2018 and the expected earnings for the fourth quarter, which companies will report soon. It is worth noting, once again, that’s not actually how much they paid in taxes. Investors will never truly know that because companies don’t have to make their tax returns public, even to their owners. Still, experts consider the accounting provision for tax payments, which includes state and foreign income taxes, to be a pretty good indicator of whether taxes are going up or down. It’s a pretty good bet that much of the drop in 2018 came from the lower federal corporate income rate.
Using the tax provisions, I calculated the companies’ 2018 tax rates and then compared them with what they had paid on average going back to 2014. I then applied the difference between the 2018 rate and what those companies had paid in the past to expected 2018 pretax profits to calculate the tax savings. I had to exclude REITs and similar companies that pass on most of their profits to shareholders to avoid paying taxes themselves, as well as a few companies, like Mattel Inc., which has lost money for the past two years but still paid taxes. I did include the relatively few companies that reported higher tax costs. What I found was that the tax law cut the average effective corporate tax rate for companies in the S&P 500 to 19 percent from 28 percent a year ago. That includes all taxes, such as local and international levies, not just federal income taxes. The result: S&P 500 companies saved $144 billion, or $395 million a day, in taxes in 2018.The more difficult question is whether the tax has provided an economic boost. In October 2016, analysts estimated that the companies in the S&P 500 would earn a collective $146.80 a share in 2018. Those earnings are now looking as if they will come in a good deal higher at $159.20 a share. That includes the tax cut, which lifted earnings by nearly $15.70 a share. Exclude the tax impact, and S&P 500 companies actually earned less last year, $143.50 a share, than they were expected to before Trump was elected president. That suggests that the tax cut hasn’t provided much income growth outside the actual tax savings. It is possible earnings missed expectations because companies paid raises or spent some of their tax savings in other ways. But even in the unlikely event that full $3.30 a share ended up in employees’ paychecks — an average raise of $10,000 per worker — that would still be a 20-80 split of the tax gains between workers and corporate America.
As for whether Trump has on balance been good for the market, the S&P 500 companies are worth $3.8 trillion more today than the day before Trump was elected. That’s good. But in that same time, the earnings of the S&P 500 companies have risen $404 billion. Apply the current forward price-to-earnings multiple of the S&P 500 of 15.2, and, based on that, you would expect the S&P 500 to be up $6.1 trillion, with $2.2 trillion — that’s the 2018 tax savings of $144 billion times that 15.2 P/E — coming from the tax cut. But it’s not. It’s $2.3 trillion short of that.
That gap can be attributed to myriad reasons, including rising interest rates, a weakening global economy, worsening trade tensions and growing uncertainty about Brexit. But at least some portion can be can be called the Trump Discount — the amount Trump’s actions, from his trade war with China to his more recent eagerness to shut down the government have hurt the value of the market and the investment accounts of many Americans. The tax cuts provided a short-term boost, but given how large the Trump Discount has swelled, it is harder and harder for investors to notice.
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Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
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