May 23, 2018
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Wall Street is among the GOP tax law’s biggest winners, report says

Richard Drew | AP
Richard Drew | AP
A pedestrian passes the New York Stock Exchange, April 5, 2018.
Jeff Stein, The Washington Post

The construction and manufacturing industries will be the biggest initial winners of the Republican tax law, but in the long run, the tax law’s biggest winner is expected to be the finance industry, according to a new report from a consulting firm.

A provision in the GOP law granting companies the ability to fully deduct investments is expected to generate large short-term gains for capital-intensive companies, helping firms that want to build new factories or buy expensive new tools. But that break fades and then disappears entirely under the GOP law, which limits the long-term gains the law offers home builders and manufacturers.

The report says that in the long run, the bill’s biggest winners include the finance industry, which relies less on tax breaks for capital projects. These kinds of firms particularly benefit from the law’s dramatic reduction of the corporate tax rate, which extends beyond the decade.

The report, set to be released by Ernst & Young this week, offers one of the most comprehensive industry-specific breakdowns of the winners and losers of the Republican tax law, and it suggests that some sectors of the U.S. economy come out ahead of others. It also finds that the Republican tax law will juice overall American economic growth by about 1 percent over the next 10 years, an estimate similar to a number of studies published by various nonpartisan analysts, including Congress’s official scorekeeper.

The GOP tax law dramatically reduced the tax rates paid by American corporations, permanently slashing them from 35 percent to 21 percent. For the first five years of its implementation — or until 2023 — the law also gives companies the ability to deduct new investments from their taxes, a policy known as expensing.

This benefit explains why companies that routinely make large upfront investments are expected to grow substantially. The provision phases out slowly before completely disappearing in 2026.

“Industries that are less leveraged and very capital intensive do better at the beginning,” said Bob Carroll, national director of Ernst & Young’s economics and statistics team. (Carroll also noted that there were elements of the tax law that could hurt the insurance industry that were not reflected in the Ernst & Young analysis, so the report may overestimate its benefits under the law.)

The effect of the policy change may already be showing up. In February, the economy created 65,000 new construction jobs, driving a substantial chunk of that month’s wage growth. The federal government expects the number of construction workers to grow by 12 percent over the next eight years, much faster than the average for other occupations.

But as the tax break for capital investments fades, so, too, does the projected economic activity in construction and manufacturing. (Some House Republicans have called for the tax benefit to be made permanent in a second round of tax cuts, but their legislative prospects are uncertain.) Beyond a decade, the GOP tax law is expected to increase the size of the manufacturing sector by less than half a percentage point, according to the study.

The study also found that the GOP tax law would reduce the average tax rate on wages and salaries by 10 percent from 2018 until 2025. After 2025, the law’s cuts to individual taxpayers’ rates also expire, although Republicans are pushing to extend them.

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