If Republicans Really Wanted a Middle-Class Tax Cut, They Could Have Passed a Much Better (and Cheaper) Tax Bill

Posted in: Tax and Economics

Republicans passed, and Donald Trump signed, a disastrously bad tax bill in December 2017. Because the negative effects of that bill are not happening immediately, Trump and his supporters in Congress—and, much more importantly, his cheerleaders in corporate executive suites around the world—are doing everything they can to somehow turn this political ball and chain into a winner by trying to sell it as a boon to the middle class.

Luckily, objective reality still exists. True, the issues are complicated, and some business reporters from even the supposedly liberal press are reporting spin as fact when it comes to tax cuts (as they have all along). Even so, most readers of this column by now have surely seen at least some analyses explaining why the supposedly wondrous effects of the Republicans’ regressive tax bill are nonsense. Even so, more needs to be said.

In a recent column, I explained how Trump’s sales pitch essentially boils down to taking credit for not having ruined the very good situation that he inherited from Barack Obama. The most generous thing that I could write was that Trump “did not do anything good other than not doing anything bad.”

Even that, however, was probably too generous on my part, because even on economic issues, Trump has done plenty of bad things, including not just this stroke-the-rich tax bill but his campaign to slash environmental, consumer, and safety regulations.

Still, we are faced with the classic correlation-versus-causation fallacy. Trump signed a tax law, then some good things happened. But imagine that this was not actually a fallacy. Imagine that the Republicans’ tax bill actually did cause the worker bonuses and other bits of good news that Republicans and corporate PR offices are now touting. Would that justify having passed the bill?

The answer is no. If the tax bill’s effects are what its anti-government backers say they are, there was a much, much better way to achieve the same results. We could have made workers at least as well off as they are now, in fact, at a fraction of the cost of the Republicans’ tax bill.

We have, in short, swatted the proverbial fly with a gold-plated sledge hammer. Guess who gets to keep the hammer— and guess who will be left to clean up the damage.

Trickling Down on the Forgotten People

The big news that most people have heard by now (mostly because Trump keeps repeating it) is that some companies have announced thousand-dollar bonuses for their workers. It turns out that most of the bonuses that have been announced are for smaller amounts, but it is undeniably true that a very small percentage of workers is receiving bonuses.

The reasons that those businesses are announcing the bonuses, however, are not exactly based on textbook economics. Describing a list that Republicans are compiling about companies that have announced such bonuses, a recent article in The New York Times pointed out:

But a deeper look at the list of approximately 200 companies shows that more than economics is probably at play, with business experts and analysts saying that alternative motivations are likely to be behind the sudden flood of corporate generosity. One major Republican donor owns 11 of the firms on the list. Several companies are contending with problems with regulators in Trump’s administration. And so many companies have settled on the $1,000 bonus figure that it appears, to some, to be just as much about a public relations push as anything else.

One particularly galling Washington Post headline offered this pro-Republican spin: “‘Big Positive Surprise’ Coming From Trump Tax Plan, CEOs Say.” For roughly the first half of that article, readers were treated to Republican talking points supporting the idea that the tax bill could be a big win for the US economy.

Only at the midpoint of the article did the reporter reveal that the words “big positive surprise” came from a Wall Street financier who had chaired one of Trump’s business advisory councils. This was not a CEO of a manufacturing company saying that the new economics of a post-tax cut world would result in putting Trump’s aggrieved supporters in the Midwest back to work. It was a Trump crony telling a gullible reporter what Trump wants people to hear.

At best, we have Trump/Republican donors essentially using part of their tax windfall to make a political point. And it turns out that they are making that point on the cheap. Disney, for example, is spending almost exactly ten percent of its tax cut this year on worker bonuses. To emphasize what should be an obvious point, the other ninety percent is not going to workers.

Similarly, as Michael Hiltzik explained in The Los Angeles Times, the splashy announcement by Apple of big bonuses and investments, as well as the 20,000 jobs that they are claiming will be created (a claim that Trump has predictably highlighted), are a chimera. Hiltzkik points out that Apple employs in total fewer than 100,000 people in the US, yet it claims to have “created” two million jobs. It now says that its recent moves will “create” 20,000 jobs. If that sounds suspicious to you, you are not alone.

Similarly, Apple’s payment of about $38 billion in taxes on “repatriated” profits is not what it seems, because the money was never truly expatriated in the first place. It was beyond the reach of US tax laws, but that is because US tax laws were already incredibly generous to companies like Apple.

More importantly, the money involved is a fraction of the money that Apple was refusing to declare for tax purposes, precisely in the hope that Congress would eventually pass a corporate giveaway. Hiltzik quotes tax expert Edward Kleinbard: “Apple is paying a record tax because for the last two decades, it has been the world champion at global tax avoidance.”

Moreover, unlike workers’ bonuses, these corporate tax cuts are not one-shot deals. They will reduce companies’ taxes every year for as long for as the bill is on the books, because (in contrast to the small personal tax cuts for middle-class people), Republicans put no expiration date on the corporate cuts.

Again, there is no reason to believe that the tax bill actually caused companies to give worker bonuses (other than the politically motivated ones). A close friend of mine, for example, found out in October that his employer was not going to give annual merit-based salary increases (for the first time in anyone’s memory), opting instead to provide one-time bonuses.

This friend’s boss tried to insult everyone’s intelligence by saying that bonuses are “exactly the same” as salary increases, conveniently ignoring the fact that the one-year bonus is replacing the salary bumps that would have been earned every year going forward if base salaries had been adjusted upward. Moreover, any future salary increases (or, for that matter, any future bonuses that are based on employees’ salaries) will be computed against a smaller base.

But hey, my friend is receiving a bonus, and it is being paid after Trump signed the tax bill. Republicans call that a win.

What Does Supply-Side Economics Mean?

Notwithstanding the self-serving spin, it would count as a net positive if business leaders’ frantic efforts to give Trump political cover actually improved people’s lives. The long-term cost to our democracy might be quite high, but people are understandably happy when they receive extra money.

Is there a positive way to describe what is happening?

The economy creates and destroys jobs all the time. Some types of jobs never come back (for example, coal miners, due not to a “war on coal” but technology and competition), and others are created. If it were true that the Republicans’ tax bill would not have any impact on the economy, we would expect to see employment and growth unchanged in the future.

True, the most recent economic growth numbers were disappointing, coming in at 2.6 percent growth in the fourth quarter of 2017 rather than the 3 percent rate that the White House had promised. Trump could not be bothered to tweet about that news, of course, but he would surely point out that the tax bill was signed in late December. Are the good times now about to roll?

As it turns out, the respected and generally politically independent International Monetary Fund (IMF) did recently increase its estimate of US growth, from 2.3 percent in 2018 to 2.7 percent. (Again, The Post offered political salve to Trump in its headline: “U.S. Economy to Grow 2.7 percent in 2018, Boosted by Trump Tax Overhaul.” Has Sarah Huckabee Sanders hacked The Post’s server?) That is still not at the four, five, or six percent levels that Trump casually promises, but 2.7 is better than 2.3. Why complain?

The IMF itself provides the answers. Part of their upward revision is caused by the effects on the US of increased growth elsewhere in the world, while the part that is tied to the US-based effects of the tax bill are driven entirely by the spending effects of the small, temporary middle-class tax cut that is part of the overall bill.

Importantly, much of any positive effect (which might be overstated, by the way) will be offset later, making this not so much a matter of increasing growth as changing when the economy grows. The tax law, according to this supposedly pro-Trump report, will not have an impact on the long-term picture.

But it is even worse than that, from a conservative perspective, because the IMF’s estimates essentially say that any growth increase is a demand-side effect, that is, simply a matter of putting money into people’s hands and letting them spend it. The middle-class people who receive a few hundred dollars in reduced taxes (and the much smaller number of people who might receive a bonus from their bosses) will spend that money, and that is temporarily going to make the economy grow a bit faster, says the IMF.

Again, is that not a good thing? The best way to answer that is to imagine going back in time to three or six months ago and saying to a conservative economist, “So, your proposed tax cut will be good for the US economy because people will get a little bit of spending money, and that will have a multiplier effect so that the economy grows. Is that right?”

Every conservative economist that I have ever met would have been aghast. The less polite among them would have called the questioner a moron and accused him of slander. That is most certainly not the way that conservatives believe their tax cuts are supposed to work.

The conservative/Republican case for tax cuts is based on the idea that liberal economists are foolish believers in demand-side (or Keynesian) economics, which says that putting money into people’s hands causes them to increase their demand for goods and services, and businesses then respond positively. Foolish nonsense, conservatives have always said.

The preferred story for conservatives is that businesses and people will not simply spend the money from the tax cuts but will instead become more productive. The capacity of the economy is supposed to increase, not merely the buying power of consumers.

Republicans, of course, are still claiming that those long-term productivity gains are sure to come. They are wrong, at least based on the overwhelming evidence that shows that tax rates do not affect the long-term growth rate of the economy.

At this point, however, we instead see Republicans as opportunistic Keynesian converts, hollering to the heavens about the modest and temporary uptick in growth projections that are driven by consumer spending and businesses’ decisions to hasten some investments. Who cares why this is happening, they say. What matters is that it is happening.

As I suggested at the beginning of this column, however, it does matter why it is happening. After all, if only the slice of the tax cuts that temporarily benefited middle-class Americans is driving the good news, we could have gotten what we wanted without the huge giveaway to the Republicans’ wealthy donors and corporations.

The $1.5 trillion cut in taxes includes one trillion for corporations, and the remaining half trillion is skewed such that about eighty percent of the money will go to the wealthiest Americans. That means that we are about to see what roughly a hundred billion dollars of middle-class tax cuts (spread over a few years) can do.

This is also true of the worker bonuses that have been announced. If corporations are giving about ten percent of their first year’s cuts to workers and sending the rest to wealthy shareholders and top executives, then we could just as easily have given middle-class taxpayers a one-year tax rebate for the same amount and saved the rest.

Not only would this have saved a lot of money for the Treasury, but it would also have prevented yet another surge in inequality in this country.

Republicans, however, only want us to notice that some small amount of temporary balm for the middle class might be attributed to this tax bill. Even if they were not exaggerating its effects, we could have done this much more directly and at much less expense. That used to be what “conservative” meant.

Posted in: Tax and Economics

Tags: Legal, Tax

8 responses to “If Republicans Really Wanted a Middle-Class Tax Cut, They Could Have Passed a Much Better (and Cheaper) Tax Bill”

  1. MD says:

    Isn’t it interesting listening to a democrat sycophant bashing a Repulican plan none of the democrats voted for. I watched my paycheck shrink under Obama and our constitutional guarantees vanish under his abuses. 8 years of failure and now democrats want to claim credit for the Trump economy. You are well and truly delusional. You’ll note there are no academics in cabinet positions. We only want people who know how to succeed in the real world.

    • motorcity555 says:

      Trump economy? You mean this disastrous bubble that is about to burst any day now? Trumps’ mere existence on planet earth would put the average individual into a grand mal seizure mode. We’re headed economically as a result of a tax bill where less revenue streams into the government coffers and with too much money chasing too few goods because of the hurriedness to prove that the predator in chief couldn’t get any legislation through during his first year in the white house, we’re all going to pay a year from now if not sooner. Tell me is the kool aid grape or strawberry mix?

    • TZ says:

      You paycheck did not shrink under Obama. Nothing you say after that can be trusted.

  2. Brett says:

    Mr. Buchanan, in typical far-left fashion, would rather that all Americans pay more in taxes, and that corporations be able to produce fewer jobs for the American people to fill, just because. Unreal.

    • TZ says:

      Clearly you have too much bias against those you disagree with to be taken seriously. At least that is the Nunes standard.

  3. The most intelligent item I have heard from the left is that the tax cut is not as good because the middle class tax cut is termed to expire in a number of years. Well the interesting thing is that the only reason for this is that to have it be permanent the democrats would of had to vote for the bill. To anyone with any intelligence combined with honesty would have to conclude that this was an impossible venture so what was passed was ALL the democrats would allow! To be more clear to pass the non-corporate tax cut permanently they would need 60+ votes. The Congress, could bring up a bill to make the tax cuts permanent so where are the democrats with this bill?

  4. dacamafamily says:

    The benefits of the corporate tax cut will only accrue to two groups, shareholders and employees. This is because while it has increased the after tax return on all three inputs, land, capital and labor; none of the benefits of the cut will accrue to land. Wages, benefits and corporate book values will increase which is good for everyone.