By Alan Murray and Geoffrey Smith
November 30, 2017

Good morning,

The U.S. Senate is moving toward a decisive vote on its tax bill Friday. And while the outcome remains unclear, the momentum looks hard to stop.

A number of CEO Daily readers have taken me to task for being too generous to the GOP tax effort. Their view, stripped of expletives, boils down to this: 1) corporations don’t need a tax cut; 2) the individual tax provisions ultimately hurt the least affluent; and 3) the bill adds to the national debt at a time when we should be reducing debt. Let me try to address.

Re: 1) — There is widespread agreement that the current corporate tax system is a mess, with nominal tax rates too high to be globally competitive, tax breaks that distort economic decision making, and penalties on overseas profits so big that they encourage U.S. companies to either move overseas, invest overseas, or keep earnings locked up in tax shelters overseas. The proposed new corporate tax regime may not be perfect, but it is better than the existing one, and should cause some boost in investment in the U.S.

Re: 2) — Most analysis showing the bill hurts the middle class is based on 2027, when the individual tax cuts are set to expire in order to minimize the effect on the deficit. But tax writers know that’s a cynical legislative ploy: whoever controls Congress a decade from now is unlikely to allow the standard deduction to be cut in half. (There’s a good analysis of the bill’s effect on individuals here.)

If individual tax provisions don’t expire in 2027, of course, that makes 3) even more of a concern. Here, I have no argument with the critics. The corporate tax changes likely will stimulate economic growth, but not enough to offset the full effect on the deficit. So the ultimate question is this: Is the benefit—a saner corporate tax system—worth the cost—a significant addition to U.S. debt?

Traditional Keynesian analysis would argue now is the time to be trimming the debt, so an over-stimulated economy doesn’t lead to inflation, and so “crowding out” of private savings doesn’t drive up real interest rates. But there ‘s no evidence of inflation or “crowding out”, leaving that traditional analysis in tatters. So put me on the fence.

I do, however, have a political concern: a tax bill passed on a party line vote that appears to prioritize corporate interests over individual interests could deepen public disaffection. And that, ultimately, could come back to bite the same CEOs who are now celebrating.

More news below.

Alan Murray
@alansmurray
alan.murray@fortune.com

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