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.

Last Week Tonight Episode on ‘Long and Infuriatingly Proud History’ of Corporate Tax Cheating

It’s a pretty good video (link) based on its evidence and presentation, and I say that as someone who has spent a fair amount of time studying corporate tax systems.

Comedian John Oliver pulled no punches (well, he pulled a few) during Sunday night’s episode of “Last Week Tonight,” especially in the feature segment in which he eviscerated the U.S. tax system by revealing just how endlessly favorable it is to corporations and the wealthy at the expense of everybody else.

Citing last year’s massive tax giveaway to the rich, which will ultimately raise taxes on tens of millions lower-income families, Oliver says, “We just had a huge chance to reform our tax code and we absolutely blew it.”

As The Week details, Oliver goes on to pillory the ability for corporations to avoid taxes by exploiting loopholes and a worldwide web of tax shelters:

Oliver walked through the “long and infuriatingly proud history” of corporate tax avoidance, with a special nod to Apple and Google for being top “innovators in weaselly accounting,” though GE and other huge companies paid zero federal taxes for much of this century. The new tax bill does force some of those companies to pay taxes on money stashed overseas, but at bargain rates — a gamble that did not pay off in terms of job creation in 2004, and probably won’t this time either, Oliver said.

Analysis Finds Only 6% of Corporate Tax Cut Gains Spent on Workers

Tax cuts for the large corporations who wrote the Republican tax scam legislation haven’t even lead to any increase in investment. In January, orders for non-defense capital goods actually fell by about 1.5 percent, and since orders take little time to initiate, they should have increased if the tax cuts were to spur investment. The reality of what a scam this whole ordeal was must be remembered for fighting off the same problem in the future.

While many corporations immediately launched aggressive PR campaigns crediting the tax plan Trump signed in December with new “investments” in employees, a study by the nonprofit group JUST Capital published on Wednesday found that the sensational headlines touting worker bonuses obscured the fact that the vast majority of the law’s benefits have gone straight to the pockets of wealthy shareholders.

“Post-tax cut raises, bonuses, and other worker investments announced by 90 of the largest publicly-traded corporations average just six percent of the total windfall these companies have received from the biggest tax cut in U.S. history,” the group found.

The analysis also showed that 56 percent of these worker investments came in the form of one-time bonuses, not permanent pay raises.

Additionally, the vast majority of companies examined invested none of their windfall into new jobs, while just a few companies said they invested a large percentage—making it appear that all of the companies invested more in jobs than they actually did.

Bolstering JUST Capital’s study was a New York Times analysis published on Monday, which found that rather than investing their tax windfalls, companies are using the extra cash to buy their own shares—a practice that further enriches already wealthy executives and investors but does little to nothing for workers or the overall economy.

“American companies have announced more than $178 billion in planned buybacks—the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm,” notes Matt Phillips of the Times.

That amount dwarfs the relatively small gains workers are seeing from the tax law.

As the economists Rick Wartzman and William Lazonick noted in a recent op-ed for the Washington Post, the “nation’s workers are getting woefully little, at least relatively speaking.”

“Peeking beyond the PR, our analysis finds that major corporations are planning to spend more than 30 times what they are putting in the wallets of employees on buying back their own stock,” Wartzman and Lazonick concluded.

Tax Cuts and Growth

The data is revealing enough about the lie too common among politicians.

In decades past, there was bipartisan support for policies that laid the basis for a long period of broadly shared prosperity. Unfortunately, this consensus seems to have been replaced by the narrow-minded greed of the very rich and, insofar as they can continue to get their way, the story is not likely to end well.

Take, for instance, the Republican tax plan, which passed in December and contained a potpourri of tax breaks for special interest groups and high-income households. Its centerpiece was a large cut in the corporate income tax; the plan lowered the rate from 35 percent to 21 percent.

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First, we tried cutting corporate taxes to stimulate the economy before: Although it received little attention during this most recent debate, the corporate rate was lowered from 46 percent to 35 percent in 1986, roughly comparable to the current cut. If we consider the share of profits that firms get to keep, the 1986 cut meant that the share kept increased from 54 percent to 65 percent, a 20 percent increase. The latest tax cut increased the share of profits that companies get to keep by 22 percent, going from 65 percent to 79 percent.

The 1986 tax cut did not, however, lead to an investment boom. In fact, investment actually fell relative to the size of the economy in the next two years. So, it’s hard to believe that the slightly larger tax cut in the new bill will have a more positive impact on investment.

Besides which, as a practical matter, tax rates have been shown to be a relatively minor factor in determining where companies invest – but they do affect where companies have their profits appear. For example, Apple reports that a huge share of its profits were earned in Ireland, where the corporate tax rate is just 12.5 percent, and Google claims to earn billions in the Cayman Islands, where the tax rate is even lower.

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But what is perhaps most disturbing about the Republican tax plan is that it seems to steer the United States in the opposite direction of proven paths to growth. Looking back in the past, whether across states or across countries, low tax rates have never been the spur to growth. The spur to growth has been a well-trained and well-educated workforce, coupled with the infrastructure needed to support growth.

Republican Tax Scam Gives 15 Giant U.S. Corporations a $236 Billion Tax Cut

What a time to be alive while witnessing these giant moral travesties that benefit the richest corporations at the expense of the general public.

In “further proof that the Republican tax bill is a massive giveaway to the largest corporations in the country,” a new report (pdf) prepared for Sen. Bernie Sanders (I-Vt.) and published on Monday found that 15 of America’s most profitable corporations would receive a combined $236 billion tax cut if the GOP plan becomes law.

Released as Republicans gear up for a final vote on their tax bill as early as Tuesday, the report notes that “[o]ver the last 30 years, 15 of the largest U.S. corporations have accepted $3.9 trillion of corporate welfare in the form of subsidies, tax credits, and bailouts, and another $108 billion in government handouts in the form of federal contracts.”

“On top of this $4 trillion boondoggle,” the analysis adds, “Republicans want to give these corporations an additional $236 billion tax cut.”

Among the companies the report highlights are Apple, Pfizer, and Walmart, all of which utilize fancy “accounting tricks to dodge taxes” while also taking advantage of government programs that add to their bottomlines at the expense of American taxpayers.

moral-travesties

The report goes on to observe that far from living up to its lofty goal of discouraging outsourcing, the deeply unpopular GOP tax bill actually “encourages companies to shift their jobs and profits overseas by moving to a ‘territorial’ tax system that would exempt future offshore profits of U.S. subsidiaries from taxation.”

While these companies stand to benefit massively from the GOP’s bill, “more than half of middle class families will pay more in taxes at the end of ten years,” Sanders said in a statement.

“Further, by running up a $1.4 trillion deficit, the Republicans are paving the way for massive cuts to Social Securirty, Medicare, and Medicaid,” Sanders concluded. “This is a tax bill written for wealthy Republican campaign contributors, not for the average American. It must be defeated.”

Sanders’ report coincides with an analysis (pdf) released Monday by the nonpartisan Tax Policy Center, which found that over 82 percent of the GOP bill’s benefits would go to the top one percent of Americans and nearly 60 percent would go to the top 0.1 percent by 2027.

The Republican Congress’s Massive Tax Scam

The Republican Congress is trying to ram through legislation that benefits the rich at the expense of some of the poorest and most vulnerable members of society. It is clearly the single most blatant giveaway to the wealthy and large corporations that has occurred in a long time. It is legislation so reprehensible that it can have a stunning effect on those already struggling to deal with so much suffering.

The way to approach detailed analysis of this type of political atrocity is to systematically break it down, so as to prevent it from be too overwhelming to look at. A first note is to observe that there was a House of Representatives version and a Senate version, both of which manage to be uniquely horrifying by having different cruel provisions.

In both versions however, the repeal of the estate tax is a big example of a handout to the richest people in the country. The estate tax only affects two tenths of one percent of the population — in other worlds, only an extremely small minority of people pay the estate tax. The idea that small family farmers pay it is a myth. The exemptions are also large — $11 million for a couple and $5 million per person — is currently allowed to be exempted, and the majority of the richest people in the U.S. are already married.

Another part of the estate tax’s relevance is that it provides an incentive for rich people to do something with their money, as there will be a fair number of people who would rather decide themselves what to do with their money than have the government decide after their deaths. The foundations and organizations rich people create are not always beneficial to the general public, but there are times when they are, and it would be a shame for that to be replaced by rich people letting even higher amounts of cash sit idle.

Use of the phrase “death tax” constitutes a propaganda term designed to provide a negative connotation to taxing extreme wealth. The alternative to saying that is to call it a Billionaire’s Tax, which in large part is what it actually is.

In any case, a lot of rich people are able to escape the estate tax through the loophole-ridden U.S. tax code anyway. That’s an argument for improving it instead of eliminating it, however. The estate tax brings in an estimated $20 billion a year, which – while not the biggest sum of money in the federal budget – still adds up to $200 billion (twice the Department of Education’s annual budget) at today’s rate over the next decade. With literally trillions of dollars worth of wealth about to be inherited over the next several decades, that number should increase substantially though.

There is also the desire to prevent an oligarchic form of society dominated by inherited wealth. The U.S. was formed in part due to revolts against the unjust control exerted by the British monarchy, which of course provides a similarly parallel example of too much inherited power. The U.S. is already either an oligarchic society or as close to being one as possible, with even elite academic research out of Princeton effectively verifying this. A small number of billionaires already exert tremendous control over various aspects of American society, and removing the estate tax will itself make that dynamic even more difficult to change.

The top 1 percent already control more wealth (at about 40 percent of the U.S. total) than the bottom 95 percent of the U.S. population. In particular, the top 0.1 percent now have the same wealth as the bottom 90 percent of the U.S. population. Income inequality also feeds into the notion of an economic oligarchy, with the top 1 percent – the richest 3 million people in a country of 330 million – receiving over 20 percent of all income. This top 1 percent – and it really is a story of the top 1 percent, as the data shows and as Occupy Wall Street accurately described – receives about half of all new income too, which shows who the economic system is primarily working to advance is.

These are levels of American economic inequality that haven’t been seen since the later part of the 1920s, and – remembering the disastrous Great Depression that followed – they are not levels that should be still here, much less be made worse.

Furthermore, the tax scheme’s deductions basically amount to a smokescreen and a talking point for puppets of the plutocratic class (Republicans in Congress advocating the tax scam) to try to convince the middle and working class that the legislation is in their interests. We could run through the deduction numbers of why the Republican Congress is again dedicating itself to serving the interests of extreme concentrated wealth at length, but the rest of the legislation alone should provide ample evidence to whom the tax scheme was actually designed for.

In a few points, raising the deductions loses relevance when the taxes on the middle class are also being raised. The added deductions therefore aren’t enough to make much – if any – of a positive difference for the middle class and poor. The Republican officials are simply trying to appeal to the middle class using baseless rhetoric because their actual economic policies cannot win enough votes.

The repeal of the individual mandate would lead to an estimated 13 million people losing their health insurance, which would also lead to increased healthcare costs via higher premiums for many people. The individual mandate is an unfortunate necessity because it has stabilizing effects on the largely mediocre, bureaucratic, and inefficient U.S. healthcare system. Millions less people without health insurance could quite likely mean that the rich are allowed to keep more money while the healthcare system is destabilized, but it isn’t entirely clear why this repeal was included in the tax scheme. It’s probably multiple nefarious reasons though.

Lowering the corporate income tax is another significant element. The U.S. may have among the highest statutory corporate tax rates at 35 percent, which is something of a memento of what it was during the generally better economic days of the mid-20th century’s golden era of regulated capitalism, but the U.S. has plenty of deductions that make the actual rate a lot lower. The effective corporate tax rate in the U.S. is actually somewhere around 17 percent on average, which puts the country towards the lower end of the OECD corporate tax spectrum. Lowering the corporate tax rate to 20 percent will probably mean loopholes in the tax code will drive that effective rate down to even lower levels, which would them force more of the general public to pay higher expenses for important government programs.

Lowering the tax rates of income from pass-through corporations is another giveaway to rich people. Using pass-through corporations would allow rich people to lower their income taxes through passing their income through those specific corporations. That would provide an incentive to use pass-through corporations that has no rational economic justification, but this is largely designed for the crony currently sitting in the White House.

Bringing back the estimated $2.6 trillion in corporate profits overseas to be taxed at a low rate is the definition of corporate welfare. Instead of being punished for immorally exploiting the loophole in the tax code, the repatriation of these huge corporate profits rewards corporate misbehavior. This experiment of lowering the corporate tax rate has already been done before, and it’s already been shown as a failure for boosting investment. Higher corporate profits have no correlation with increased investment historically. The Republican Congress is evidently willing to substantially raise taxes on struggling graduate students instead of large corporations anyway though.

Overall, it’s daunting that there’s actually a tax plan being pushed that would give even more money to the rich when they’ve done enormously well over the last four decades of upwards redistribution. The estimates are now that the top 1 percent would be gaining 75 percent of the benefits by the time the tax scheme is fully phased in by 2027. That’s class warfare in a nutshell, and robust public interest organization is the only mechanism that will reverse it.

The Congressional GOP Tax Scam

The tax scam is absolutely horrendous. U.S. citizens, call or contact Congress if you are able. The Capitol Switchboard number is 202-224-3121.

Just as “bombshell” revelations where being made public late Friday morning about President Donald Trump’s former national security advisor Michael Flynn, Senate Majority Mitch McConnell told reporters just before noon—following a “complete shit show” of legislative maneuvering on Thursday night—that Republicans finally “have the votes” to pass their widely decried tax overhaul bill.

As numerous critics have warned, the GOP plan would exacerbate already historically high levels of economic inequality by giving enormous tax cuts to corporations and the richest individuals while increasing the tax burden on millions of low-income and middle class families in order to pave the way for massive cuts in future social spending, including a premeditating assualt on education, Medicare, Medicaid, and Social Security.