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Trump tax cuts and the economy

By       Message Seymour Patterson       (Page 1 of 1 pages)     Permalink    (# of views)   5 comments

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The recently passed Tax Plan presumably has as its core it cutting middle class taxes. It seems, however, that it does not do that and its framers have almost stopped pretending it does. The president rightfully celebrated passing a tax cut that Rep. Paul Ryan wanted. It's a much pined after win. It gives large tax cuts to corporations. Thus, corporations have much to celebrate. In addition, the top 1 percent of the population will see their marginal tax rate fall from 39.6 percent to 37 percent; coupled with a drop in the corporate rate from 35 percent to 21 percent. (See CNBC) The tweaking of the bottom tax rates will result in modest tax savings for the poor. On its face, this tax plan is a bad idea--it is redistributional and punitive (taking away the public option to finance the deficit and leaving potentially 13 million people without health insurance).

One can have reservations that the expected growth and job creation touted will flow from the Tax Plan. One can also harbor reservations about repatriation of trillions of dollars held by businesses abroad. The first statement recognizes that fact that the US economy is operating at full employment with the unemployment rate at 4.1 percent. This protracted downward trend in the jobless rate has gone unabated over almost two decades--without tax cuts for businesses and individuals. In this job market environment, where the job market is tight, wages could conceivably rise because of labor shortage and not because of tax cuts. Another obvious consequence of full employment is the possibility of creeping inflation as output (GDP) increases at a declining rate, coupled with rising wages that increase demand for consumer goods. This is a recipe for higher prices going forward

The reason for the second statement--trillions in repatriation--is that the average tax businesses pay now is alleged to be 18 (some sat 14) percent. The new Trump tax has a maximum 21 percent tax rate. Why would businesses be persuaded to bring money back to the US when they can continue the status quo and realize a wider after-tax profit margin? With trillions of dollars abroad and record profits and the record-breaking stock market, if businesses had a will to raise worker wages, there would be absolutely nothing to prevent them from doing so.

It might also be argued that nothing has prevented CEO's from sharing record profits with their workers instead of stashing their earnings in faraway places out of the reach of the US government. There might be some issues of patriotism associated with this behavior. In the quest for higher profits, our companies chose to invest in other countries--with foreign direct investment, where environmental regulations are low as are wages--just to avoid paying taxes in the country whose policies, laws, infrastructure, educational institutions, and other intangibles make it possible for US companies to create income and wealth.

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It is debatable whether using the tax structure to influence people's behavior is a good thing. Some believe that if you cut corporate and individual tax rates people will be motivated to do the right thing: CEOs will repatriate money from abroad; they will raise wages; and they will invest in more plant and equipment. On the other hand, punishing (taking away insurance, and cutting Medicare and Medicaid benefits) people at the low end of the income pyramid will give them incentives to work hard, engage in healthy behavior, and strive harder to succeed. To view income class with such dichotomy is to arbitrarily assign a higher moral code to the rich than to the poor.

There is a view in economics that says that tax cuts do not necessarily lead to more spending, but rather to more saving in as much as people believe that in the future taxes will rise again. So there might not be the boost in economic growth that should be spearheaded by the tax cut. Those that think taxes might rise in the future are people that think if Democrats take over the Congress and the White House in the next four years, then taxes might be expected to rise again. Voters understand this. They also understand that there is a $20 trillion debt that has to be reckoned with either by raising taxes and/or cutting government spending. The new tax cut law is expected over 10 years to raise the debt by a trillion dollars. Presumably, economic growth of 3 percent will mitigate the debt. However, there is still the border Wall to be funded, and spending on infrastructure.

I would still maintain that a more promising way to promote investment when business profitability is soaring, is not by cutting taxes but by raising taxes. This might appear counterintuitive at first. But look at it this way: Assume people don't like to pay taxes. Assume also that there has to be a threshold tax rate where people (CEOs) are indifferent if they pay taxes or not. In the first instance, people would be happiest if they paid no taxes, all else being equal. In the second instance, if taxes are low it is best to pay the tax, and use the after tax earnings for a yacht: No need for paying workers more. Use a good accountant to pay no taxes at all and go to a place where your happiness is greater than zero--Uncle Sam sends a profitable business a check--examples: CBS Corp.(NYSE: CBS ), which earned $1.8 billion in 2014, paid no federal tax, and received a $235 million tax refund. (If you look back at the last five years, one more Fortune 500 giant makes the list. General Electric Co.[NYSE: GE] made $33 billion from 2010-2014, paid no taxes, and received $1.4 billion in refunds." (See Money Morning) And there are quite a few more companies that are able to get tax credits for previous years' losses and bring them forward to the current tax year to offset their profits. I refer you to a USA Today piece that lists 27 giant companies that avoided paying taxes.

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If the tax rate were above a certain threshold, say above 50 percent--maybe 70-90 percent, what can you expect? CEOs don't like to pay taxes. One way that they can circumvent the onerous levels would be to reduce their pre-tax earnings. How? By expensing wages and spending more on new plant and equipment--namely, investing more. Alas, it might be too late for this--expertise in keeping earnings abroad is fully evolved. Let's hope public statements concerning corporations repatriating earnings to the U.S.A. due to corporate tax cuts comes about.

 

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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