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Winter is coming for big business

Rick Newman
Senior Columnist

If you’re a CEO, this might be as good as it gets.

The 2017 tax-cut law brought tax payments in 2018 to the lowest level since at least 1947. That has helped push corporate profits to record highs. Consumers are spending, yet wage growth is constrained and labor costs are under control. President Trump’s deregulatory efforts provide an additional tailwind.

Recession isn’t imminent, but another threat might be: Democratic efforts to raise business taxes, break up big companies, impose new regulations and exploit the widespread impression that corporate America has it too easy.

Sen. Elizabeth Warren, who’s running for president, recently rolled out a new plan to tax corporate profits above $100 million at a flat rate of 7%. Warren argues that the tax code provides too many loopholes for companies to wriggle out of taxes, which requires a new tax without any offsets. The tax would apply to about 1,200 companies and raise around $100 billion per year, she says. That’s a lot.

Warren also wants to break up tech giants such as Amazon, Google and Facebook, which she claims are too big to be virtuous. She has a detailed plan for strengthening corporate governance and wants to impose a “wealth tax” on household assets above $50 million.

Warren is in the second tier of Democratic presidential hopefuls at the moment, and she may never lead the pack. But Warren is the conscience of the Democratic party and a thorough policy proposer. Her many ideas for corporate reform could be a blueprint for action if Democrats win the White House in 2020. They also reflect wide disenchantment with the Trump tax cuts and an opening for populist politicians to go after big business.

The 2017 tax-cut law slashed the corporate tax rate from 35% to 21%, and provided other tax breaks meant to lighten the tax burden on businesses. It worked—but that could end up backfiring on Republicans. In a recent Pew survey, just 36% of respondents approved of the tax cuts, with 48% disapproving. The portion saying corporations don’t pay their fair share of taxes is a whopping 82%.

Cutting Trump’s tax cuts

Most Democrats in Congress favor rescinding parts of the Trump tax cuts and pushing corporate taxes higher. Sen. Bernie Sanders, the taxiest presidential candidate, has been calling for sharply higher taxes for years. But moderate Democrats favor tax hikes too. Former Rep. John Delaney, who’s one of the most centrist Democrats running for president, wants to raise the corporate tax rate from 21% to 25%. “Nobody asked for 21%,” he told Yahoo Finance recently, saying the rate needed to come down from 35%, but Republicans went too far.

Most of the Democratic presidential candidates favor some form of universal health coverage. And most of them call for increased business taxes to fund it. One favorite target seems to be a financial-transaction tax that would be paid by banks and their presumably wealthy customers. Higher estate and capital-gains taxes are other popular proposals.

Another topic energizing Democrats is action to combat climate change. The Green New Deal championed by Rep. Alexandria Ocasio-Cortez of New York would transform the energy and transportation industries and create large new bureaucracies in the process, requiring big tax hikes. The plan would be so disruptive that it’s probably not feasible. But some type of climate action is feasible, and maybe even likely, with big business once again the go-to place for tax revenue, whether it’s a carbon tax or some other way of discouraging pollution.

Businesses seem safe for the next 18 months, since no legislation on taxes or anything else important is likely to pass in a Congress split between Republicans and Democrats. Even if it did, Trump would likely veto anything containing new taxes or regulations.

But business could be a big loser in the 2020 elections—even if Republicans win. Trump and his supporters promised that big cuts in corporate taxes would spur new investment, create jobs and raise up the middle class. That has barely happened, and growth is more likely to slow in 2019 and 2020 than to accelerate. More voters are likely to conclude the Trump tax cuts were corporate cronyism.

In a February Morning Consult poll, 62% of Republicans and 89% of Democrats said corporations should pay higher taxes—one of the very few areas voters in both parties seem to agree. The corporate sector is a strong pillar of the economy, but it’s also where the money is. When Washington needs more, it will know where to go.