Lessons from the 2017 Tax Scam

The tax cuts were supposed to lead to an investment boom, which would increase productivity in the economy, which would then in turn provide a boost to real wages for most workers. That essentially didn’t happen of course, and it was simple enough to predict that with an economy already so rigged for the richest at the expense of everyone else.

It’s a bit less than a year since Congress passed the Trump tax cut, but we are far enough along that we can be fairly confident about its impact on the economy. There are three main lessons we can learn:

  • The tax cut is to not leading to the promised investment boom;
  • The additional demand generated by the tax cut is spurring growth and reducing the unemployment rate;
  • The Federal Reserve Board’s interest rate hikes are slowing the economy in a way that is unnecessary given current inflation risks.

The Investment Boom: Just Like Jared Kushner’s Hidden Genius, No One Can See It

Taking these in turn, it is pretty clear at this point that we will not see the investment boom promised by proponents of the tax cut. This point really has to be front and center in any discussion of the benefits of the tax cut. By far, the largest chunk of the tax cut was the reduction in the corporate tax rate from 35 percent to 21 percent, along with various other measures lowering corporate taxes.

The immediate impact of a corporate tax cut is to give more money to the richest people in the country since stock ownership is highly skewed towards the top 10 percent of the income distribution and especially the top one percent.

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The data for the first three quarters of 2018 indicate that this is not likely to happen. Investment is up modestly, but we’re clearly not seeing the promised boom. In the first three-quarters of 2018 investment was 6.7 percent higher than in the same period last year. By comparison, investment rose by 6.9 percent in 2014 and increased at a 9.1 percent annual rate from 2010 to 2012.

Much of the growth we have seen this year is not from tax cuts, but higher world energy prices spurring a boom in oil and gas drilling. If we pull out energy-related sectors, the rise in investment would be even less.

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There is also no evidence of the promised investment boom in any of the various surveys showing business plans for the future. For example, the Commerce Department reported last week that new orders for non-defense capital goods, the largest component of investment, were up by less than 1.0 percent from their year-ago levels.

In short, at this point, it certainly looks like the skeptics were right. Cuts in corporate tax rates are not an effective way to boost investment, they are an effective way to give more money to rich people.

Larger Budget Deficits Can Boost Growth and Employment

The second point is that the tax cuts did boost demand. This meant more growth and more jobs than we would have otherwise. This is a very good story; the 3.7 percent unemployment rate is the lowest we have seen in almost 50 years. The Congressional Budget Office is projecting the unemployment rate will bottom out at 3.2 percent next year. Its pre-tax cut forecast had the unemployment rate at 4.2 percent in 2019.

When we get to low levels of unemployment the people who are getting jobs are overwhelmingly workers who are disadvantaged in the labor market, blacks, Hispanics, people with disabilities, and people with criminal records. The chance to get a foot in the labor market can make an enormous difference in their lives. We don’t have any social programs that can make as much difference for these people as say, lowering the unemployment rate from 4.5 percent to 3.5 percent.

In addition to giving people jobs, the tighter labor market also gives workers in the middle and bottom of the wage distribution the bargaining power to achieve real wage gains. While the rate of real wage growth has been disappointing given the low levels of unemployment, workers at the middle and bottom have been seeing real wage gains the last four years in contrast to earlier in the recovery when their wages were stagnant or declining. It is likely that the rate of real wage growth will pick up if the unemployment remains this low or goes lower.

While boosting growth with a larger deficit offers clear and substantial benefits, tax breaks to the rich were hardly the best way to do it. If we had spent the money on infrastructure, education, or even tax breaks to low and moderate income households, it would have boosted demand by even more. And, we would have seen a longer-term dividend of a more productive economy if we spent the money on infrastructure and education.

Obviously, the Republicans’ priority was giving more money to rich people and, given their control of the White House and Congress, it was inevitable that a tax cut for the rich would be the outcome. The Republican Congress blocked efforts by Obama to have any stimulus in his second term, but he really did not push the case. Many of Obama’s top economic advisers were fearful of deficits and were not anxious to see additional spending that was not offset with either tax increases or spending cuts in other areas.

We see from the economy’s response to the tax cut — increased growth, lower unemployment, and no evidence of accelerating inflation — that the economy could benefit from a larger budget deficit. It is unfortunate that we were only able to get this boost by giving still more money to rich people.

Corporations Trying to Sell the False GOP Narrative on Tax Cuts

Hey, this latest U.S. tax scandal will be the third time in the last 40 years that America runs the detrimental experiment on big tax cuts for the wealthy and large corporations. Every rational person should be able to see that it won’t work out well for most people.

The Republican lawmakers have sold the corporate portion of their tax cuts with the claim that it is actually about helping workers. Their argument is that the corporate tax cut will lead to so much growth that the increase in wages will actually be considerably larger than the tax cut itself. The GOP’s story is that lower corporate taxes inevitably mean more investment, which means higher wages for more workers, as well as increased imports and greater productivity.

The vast majority of economists have questioned this basic logic, because in the past, investment has not been highly responsive to after-tax rates of profit. But that didn’t stop the Republican-controlled Congress from passing the tax bill. And now, in an effort to build public support for the corporate tax cut, several major corporations have been announcing bonuses and pay raises for workers.

AT&T announced that it would give a one-time bonus of $1,000 to 200,000 workers. Its rival Comcast also promised a $1,000 bonus for 100,000 workers. Fifth Third Bancorp promised a $1,000 bonus for 13,500 employees, while raising its minimum wage to $15 an hour. Wells Fargo said it would raise its minimum wage to $15 an hour, too. Boeing announced a $300 million fund to be spent on training workers, upgrading facilities and matching workers’ charitable contributions.

While the employees getting these increases will undoubtedly be pleased, there are a few caveats that must be kept in mind.

First, many of these announcements refer to one-time bonuses, not permanent pay hikes. This is not what the GOP promised. The corporate tax cuts were made permanent on the grounds that companies needed the expectation of higher future after-tax profits in order to justify greater investment today. If the economy is following the course predicted by the Republicans, all these pay increases should be permanent, too.

The second caveat is that some of the increases may have little to do with the tax cut. They can be attributed instead to the tightening labor market, along with higher minimum wage laws. This is especially true of Wells Fargo, which is based in California. The state has already passed into law a $15 minimum wage, which is scheduled to be fully phased in by 2022.

Wells Fargo will be getting there a bit more quickly if it adopts its $15 minimum in 2018. It will also be applying that hike in parts of the country where the federal minimum wage of $7.25 an hour still sets the standard, but even in these other areas, a tightening labor market is putting upward pressure on wages. Last summer, Target announced that it would get to a minimum wage of $15 an hour by 2020. That announcement had no obvious connection to any expectation of a corporate tax cut.

Third, but perhaps most significantly, these pay hikes are not especially large relative to the size of the corporate tax cut. Take the example of AT&T: In 2016, the company reported operating income, net of interest, of $19.4 billion. It paid $6.5 billion in taxes, which means an effective tax rate of 33.5 percent.

If it had instead paid the 21 percent tax rate in the new bill, AT&T’s savings would be $2.4 billion. The promised bonus for 200,000 employees comes to $200 million, or less than one-tenth the size of the tax cut. This is very much in line with the expectations of tax bill critics, who predicted that the overwhelming majority of the money that corporations now get to keep will end up as higher profits paid out to shareholders, not as permanently higher wages for workers.

The end of the article says that “So if there is going to be the huge upsurge in investment predicted by tax cut supporters, it should be showing up in the data on orders for capital goods almost immediately. . . Until we get those data, we have little basis to judge whether the tax cut will deliver the economic growth and pay increases the Republicans said would happen.” Prediction in human affairs is often a difficult task, but it’s apparent that the extra profits grabbed via the tax cuts will primarily go towards enriching executives and shareholders instead of increasing worker wages and creating valuable investments. This scam has already been seen enough times to realize that.

Dean Baker on Tax Cuts

This segment on The Real News Network covers the Trump regime’s absurd tax proposals that would benefit the richest people in the country at the expense of most of the population.

httpswww.cbpp.orgblogdespite-presidents-promise-emerging-details-point-to-large-tax-cut-for-wealthiest (2)

What is your response to these two things, two reductions, the corporate tax rate and the pass through business tax?

Dean Baker: These are likely to be big tax breaks for high-end individuals. The corporate tax rate, they have justified lowering the tax rate by saying that we have among the highest in the world, which is true, the statutory rate. In terms of what we actually collected, it was somewhere around 22% of corporate profits, which put us right around the middle of the pack.

Now, if we make the statutory rate 20%, presumably they’ll get rid of some deductions but surely the statutory rate will fall two, three, four percentage points below that, which means we’ll be collecting substantially less money in corporate income tax.

Now, one of the important deductions is for interest. Here is one of the bizarre things. They say, “Oh, we’re going to limit the corporate interest deduction,” but it doesn’t say how. That, in principle, would be a very good thing if they sharply limited it, but they didn’t care enough to put in a rate.

Now, the pass through corporation, this is potentially a huge bonanza for very wealthy people, I should point out, including Donald Trump who has most of his businesses as pass-through corporations. What a pass-through corporation means, it pays zero tax. The corporation itself pays zero tax. It goes back to the individual and where that individual is a very wealthy person, like Donald trump, they’d be paying tax at the high individual income tax rate or higher, which in his case, say this goes through, that’s 35%. Instead, he’ll just pay 25%, and what that means is you give people a very big incentive to become corporations to have their doctors, lawyers, other professionals will have most, or all their income as corporate pass through and they’ll just pay a 25% tax rate.

Here, too, we get a magic asterisk. They say they’re going to have the IRS police this to make sure it’s not abused. Well, the republicans have spent two decades weakening the IRS’s enforcement power. This would be extremely difficult thing to enforce, even if you had a very effective IRS, which they’ve done a lot to make sure we do not have.

Gregory Wilpert: Then, another related aspect is the whole thing about the repatriation of corporate taxes. It’s estimated that something around $700 to $800 billion are being held offshore by U.S. companies because their corporate tax is made abroad. They’re keeping them there, so they don’t have to pay the corporate taxes. Trump wants to provide a tax incentive, basically a lower tax rate for temporarily, so they repatriate their profits. What do you think of that plan?

Dean Baker: Let me clarify that. He’s talking about actually making that permanent. We would switch to a territorial tax system, so that they would never have to pay taxes on foreign profits. This is a big bonanza. You have a lot of companies, maybe the most successful companies in the country that declare a lot of profits overseas precisely so that they don’t have to pay taxes here, and at least as an accounting convention they keep the profits over there in many cases, The Wall Street Journal did a piece on this a few years back. The money is literally here in the United States. It’s kept in banks in the Unites States, but at least as an accounting matter, it’s still with their Irish subsidiary, or Cayman Island, or wherever they’re booking it, so they don’t have to pay taxes on it.

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Dean Baker: The alternative minimum tax was a catch-all. Basically it says no matter how many games you played that at the end of the day, you still had to pay, I think it was set at 20%. It only applied to a relatively small number of people. Donald Trump, actually ended up the one tax return that was released, or leaked out 2005, he paid the alternative minimum tax because he had enough deductions of different sorts, he would have paid less, so he still had to pay the 20% alternative minimum tax.

I don’t see a good reason for eliminating that. It applies to a very small number of people. Basically by definition, they’re wealthy because there’s a very big floor to it. Unless you’re earning a lot of money, you don’t have to worry about it. Again, unless you’re playing a lot of games, it’s moot. I don’t really see a downside to it. I don’t see anything whatsoever gained by eliminating the alternative minimum tax.

The estate tax, this too, applies only to very wealthy people. People are allowed to exempt 4 million per a person, so a married couple could pass on $8 million totally tax free. It applies to, I think it was two-tenths of 1% of estates. A very tiny number and I just don’t see a good argument as to why we shouldn’t be taxing these people. We’re going to get the money from lower income people instead? I really don’t see a downside to the estate tax, and it’s just unfortunate if we give up that revenue.

Gregory Wilpert: As I mentioned, one of the main Republican arguments, of course, in favor of lowering taxes more generally and it’s an argument that’s been around since President Reagan, is that lower taxes for both corporations and households would mean more money for spending and for reinvestment and therefore more economic growth and, of course, that this would pay for itself. What’s your response to that relatively old argument?

Dean Baker: This is one of the rare cases where we actually had the opportunity to test it. Economists, we can come up with all sorts of theories and we try to find a way to, what looks like that. In this case, we actually did it. They did it under Reagan, they did it under George W. Bush. There’s basically, zero evidence that led to any increase in growth. The growth was okay in the 80s, was not particularly strong, growth was very weak after the tax cuts that Bush put in place in 2001 and 2002. I wouldn’t necessarily blame the tax cuts for the weak growth but you’re pretty hard pressed to argue the opposite that somehow we had very strong growth but something happened and that prevented us from having good growth.

The one thing I will say for reducing complications in the systems, loopholes, basically, that is a way. That’s why I have, actually been sympathetic to the idea of lowering the corporate tax rate coupled with reducing the deductions, because the tax avoidance system is a major source of inequality. You have a lot of people on Wall Street who come up with clever tax avoidance schemes and they get very rich that way. I can’t see any reason we want people to get rich designing tax avoidance schemes. We could argue how much money we should make from designing a good product or whatever, but I can’t see any rationale for saying, “Oh, we want people to get real rich ’cause they’re clever at avoiding income taxes.” I think there’s something to be said for that, but it’s not clear how much we’re doing to combat tax avoidance with this reform plan.