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‘Why aren’t the other hands up?’ A top Trump adviser’s startling response to CEOs not doing what he’d expect

President Trump's top economic adviser, Gary Cohn, looked out from the stage at a sea of CEOs and top executives in the audience Tuesday for the Wall Street Journal's CEO Council meeting. As Cohn sat comfortably onstage, a Journal editor asked the crowd to raise their hands if their company plans to invest more if the tax reform bill passes.

Very few hands went up.

Cohn looked surprised. “Why aren't the other hands up?” he said.

He laughed a little to lighten the mood, but it didn't cause many more hands to rise. Maybe the CEOs were tired. Maybe they didn't hear the question. It was a casual poll, but the lukewarm response seemed in tension with much of the public enthusiasm among corporations for a tax overhaul.

The president and his senior team have kept saying that the tax plan would unleash business investment in the United States — new factories, more equipment and more jobs. But, perhaps as the informal poll suggested, there are reasons to be doubtful that a great business investment boom would materialize.

First, American businesses are already enjoying record profits. If they wanted to invest, they have plenty of money on hand to do it, says Howard Silverblatt, a senior analyst at S & P Dow Jones Indices, where he tracks all the financial decisions of S & P 500 companies.

Second, executives themselves have indicated they probably won't use extra profits to invest. A Bank of America-Merrill Lynch survey this summer asked over 300 executives at major U.S. corporations what they would do after a “tax holiday” that would allow them to bring back money held overseas at a low tax rate. The No. 1 response? Pay down debt. The second most popular response was stock buybacks, where companies purchase some of their own shares to drive up the price. The third was mergers. Actual investments in new factories and more research were low on the list of plans for how to spend extra money.

The results of the Bank of America poll show a very similar pattern of corporate behavior to what happened after the 2004 tax repatriation holiday when U.S. companies spent the majority of their money coming back home from overseas on stock buybacks. It was a payday for Wall Street investors that generated little benefit to the middle class and wider economy.

The Trump White House says that it is going much further than President George W. Bush did in 2004 with the tax holiday. Trump's tax plan also calls for the biggest reduction in the corporate tax rate: from 35 percent down to 20 percent. The plan also includes a provision to allow companies to write off the costs of any new capital purchases in the next five years.

Many economists think these measures are likely to cause a modest pickup in investment, but the consensus view is that the bump would be modest.

“It would add somewhat to [the] economy for a year or so,” predicts Bob Baur, chief global economist at Principal Global Investors.

And some economists aren't even sure the small boost would happen. The reason is that interest rates are rising. It has been really cheap for businesses (and individuals with strong credit ratings) to borrow money to buy stuff in recent years. But that is starting to change. Interest rates are now over 1 percent and they are on track to be over 2 percent by the end of next year, meaning it costs more to get a loan. That could be a countervailing force to the tax cuts.

“Although lower corporate tax rates by themselves would incent more business investment because of the resulting lower after-tax cost of capital, the higher interest rates largely wash this out by increasing the cost of capital,” wrote Mark Zandi, senior economist at Moody's Analytics in a report Tuesday.

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