Cohn Says Trade Disputes Could Wipe Out Tax Cut Benefits

(Bloomberg) -- Gary Cohn, President Donald Trump’s former top economic adviser, said trade disputes could wipe out the benefits of the tax cuts Congress passed last year and may trigger an economic slowdown.

Companies are hesitating to make investments because they want to see how the trade negotiations play out, according to Cohn, who previously served as president of Goldman Sachs Group Inc. The tax overhaul slashed the corporate rate to 21 percent from 35 percent, and created other incentives for businesses, such as writing off capital expenditures right away.

“Businesses are very systematic,” Cohn said Thursday at an event sponsored by the Washington Post. “These are all parts of the equation that will have to be balanced out.”

The former Trump adviser added that an escalating conflict over trade could provoke a recession in the U.S. Tariffs feed inflation and raise consumer debt, which historically have been ingredients for an economic slowdown, he said. “You never know what leads you in ’til you’re in it," Cohn said, referring to recessions.

He also suggested that Trump’s focus on the trade balance is unjustified. “I have always said a trade deficit doesn’t matter,” said Cohn.

The Trump administration plans to announce on Friday a final list of tariff targets in China, which will be imposed shortly thereafter. China is expected to retaliate with tariffs of its own if the U.S. goes ahead with its plans. In a preliminary list, the U.S. said it would levy an additional 25 percent duty on everything from TV components to dishwashers and snowblowers. Many companies have warned that the tariffs would increase their costs and raise prices for consumers.

Capital Expenditures

Republican leaders including the heads of the tax-writing panels in the House and Senate have also warned of the effects a trade war could have on the tax overhaul.

“These tariffs are ultimately paid by American consumers and cause harm to American manufacturers, undermining the success of tax reform,” Senate Finance Chairman Orrin Hatch said in a statement Wednesday announcing an upcoming hearing on the steel and aluminum tariffs.

Cohn said there hasn’t yet been signs of the surge in capital expenditures that the administration predicted the corporate tax cuts would generate.

Still, he said he remained “pretty confident” the tax cuts would give companies incentive to build new factories and hire more people as soon as “maybe next quarter.” But he said it may take as long as three to five years for a boost in corporate capital expenditures to materialize.

First-quarter earnings reports from S&P 500 companies showed the country’s largest corporations haven’t stepped up the portion of profits they devote to job-producing investments since the tax cut, even though it added about $30 billion to their collective bottom line during the quarter.

Relative to cash flow, the corporations are spending about what they always spent on such things as employment-boosting capital expenditures and shareholder goodies in the form of dividends and stock buybacks.

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