The Wolf of Wall Street could bridge the tax bill’s partisan divide

The Senate passed its tax bill with no Democratic support. This should not be surprising considering that tax reform previously devolved into shouting matches between Republicans and Senators, including between Senators Orin Hatch (R-Utah) and Sherrod Brown (D-Ohio).

It is emblematic of the yawning divide between Republican and Democratic views of the likely economic outcomes resulting from significantly cutting corporate tax rates. Republicans exude optimism when talking about the likely impact of tax cuts on employment and wage growth. A white paper from the president’s Council of Economic Advisers forecasts a $4,000 increase in wages for the average family.

{mosads}Republican optimism is matched by Democratic skepticism and cynicism. Democrats remain doubtful that promised employment and wage growth will materialize and remain cynical that the proposed bills are little more than a giveaway to corporations and the wealthy.

While this divide may seem insurmountable, leaving Americans with only the possibility of a highly partisan tax bill, there is a way to possibly achieve a bipartisan tax bill. It involves taking a page from the world of Wall Street mergers and acquisitions. 

It is not uncommon for sellers and buyers of companies to disagree on the sale price. This results from sellers basing their price on more optimistic profit projections than buyers. This is similar to the divide between Republicans and Democrats surrounding the likely economic impact of proposed tax cuts.

Republicans have optimistic employment and wage growth projections, while Democrats have a far more pessimistic view.  Much like a stalemate between company sellers and buyers, this left Republicans and Democrats at an impasse with Republicans choosing to break the impasse through partisan tax reform.    

This is not good for the country or the economy. First, it has increased partisan rancor and further divided Republicans and Democrats. This is on top of the ill effects resulting from the Democrats passage of the partisan Affordable Care Act (ACA).

Just as Republicans nearly repealed the ACA, it is likely that if Republican tax reform is passed, Democrats will promise to repeal it if given majorities in both chambers of Congress in 2018.

Whether or not they are able to repeal Republican tax reform, the ongoing possibility of repeal could have a damaging impact on employment and wage growth as companies may temper their actions in the face of tax policy uncertainty.

Partisan legislation is unhealthy for the country, subjecting it and companies to an uncertain policy environment, an environment that is not conducive to economic growth. 

Now let’s imagine we bring in a Wall Street dealmaker to achieve bipartisan tax reform. What would they do? One means used when there is a gap between seller profit projections and buyer projections is a concept called an earn out. 

In an earn out, the seller and buyer agree to a purchase price and further agree that if future company profits are greater than a certain level, the seller will earn additional money from the buyer. This allows the seller to earn a higher sale price if future profits are greater while ensuring the buyer doesn’t pay for promised future profits that never materialize.

This is a performance-based approach that bridges the gap between seller optimism and buyer pessimism. It ends the speculation and debate regarding future performance replacing it with performance based purchase price. Something similar could be implemented in current tax bills.

Instead of continuing to argue over what the economic effects of tax cuts will be, corporate tax cuts could be tied to future employment and wage growth. This would allow Republicans to try and stimulate employment and wage growth through corporate tax cuts while also addressing Democratic concerns by limiting tax cuts only to companies increasing American employment and wages.   

The American taxpayer is being asked to take on an additional $1.5 trillion in debt over the next 10 years, yet there are no guarantees of increased American employment and wage growth, only promises creating asymmetric risk.

The Wolf of Wall Street would never agree to such a one-sided deal. Instead, he would require performance based corporate tax cuts. Anything else would be a wolf in sheep’s clothing.

Chris Macke is the founder of Solutionomics, a think tank focused on developing solutions and recommendations for a more efficient, merit-based corporate tax code. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he’s a contributor to the Fed Beige Book.