Reclaim the American Dream

Another Blog Post By

Hedrick Smith

Tax Cuts – Middle Class Boost or “Fake Math”?

Washington – With Republicans surfacing more details of their tax-cut package and debate sharpening over its likely impact, Trump’s top economist forecasts a boost of $4,000 in annual income for the typical American family but most economists don’t buy that estimate and Senate Democratic Leader Chuck Schumer derides it as “fake math.”

In fact, one new study suggests that an estimated $700 billion from the tax cuts that President Trump is proposing will go to foreign investors, who own about 35% of the value of U.S. stocks.

Most economists are openly skeptical of the Trump administration’s forecasts of looming wage boosts for the U.S. middle class. “The Trump administration’s claim that large wage gains for workers will result from cutting corporations’ taxes is not supported” by most research, asserts economist Josh Bivens of the pro-labor Economic Policy institute. “There is no evidence linking corporate taxes and productivity or wage growth.”

Three nonpartisan organizations — the Congressional Joint Committee on Taxation, the Congressional Budget Office and the Tax Policy Center — all concluded that the main beneficiaries of tax cuts have been corporate shareholders, not workers, and that was before Republicans proposed limits on deductions for home mortgage interest and state income taxes.

Sharp Clash – Obama Economist vs Trump Economist

The new barrage of verbal warfare was triggered by Kevin Hassett, chairman of Trump’s Council of Economic Advisers, who contends that when corporate taxes go up, corporations cut workers’ paychecks and when taxes come down, corporations pay workers more.

Obama economist Larry Summers (left) and Trump advisor Kevin Hassett (right) clash over impacts of Trump’s tax cut plan.

If Congress adopts the current Republican proposal to cut corporate tax rate from 35% to 20%, Hassett calculates that the typical middle class household income would go up from $3,000 to $7,000 annually. But one Harvard economist cited in Hassett’s calculations said that Hassett distorted his study and that, at best, the increase would be $800 a year.

In a blistering Oped in The Washington Post, former Harvard President and Obama economic strategist Larry Summers accused Trump’s economic advisers of “absurd and dishonest” forecasts. “We know enough to say that a tax-reform plan along the lines of the administration’s sketch would not substantially increase economic growth, would blow out the budget deficit and would make the United states an even more unequal place,” Summers contended.

But a minority of economists side with Hassett, among them Douglas Holtz-Eakin, a former Director of the Congressional Budget office under Republican leadership. Holtz-Eakin recently told The New York Times that Hassett’s projections are “a reasonable, back-of-the-envelope calculation,” based on empirical research.

The Gut Question: Whom Will CEOs Reward?

On one issue, all agree: Corporations will reap a massive windfall of up to $2 trillion in after-tax profits if Congress adopts something close to the Trump tax-cut package.

The disagreement comes over what corporate bosses will do with their financial bonanza. Will American CEOs share a significant chunk of their windfall profits with rank-and-file employees or will they channel it mostly to Wall Street investors and corporate executives.

President Trump has used his bully pulpit to preach that tax cuts will inject “rocket fuel” into the U.S economy, powering a new explosion of growth and lifting the middle class.

Like a revivalist preacher, President Trump has used his bully pulpit to preach that tax cuts will inject “rocket fuel” into the U.S economy, powering a new explosion of growth and lifting the middle class.

But with the U.S. economy already in its eighth year of growth, most economists are skeptical that at this stage in the business cycle, U.S. corporate leaders are ready to invest heavily in new plants and equipment or more jobs and higher wages here at home.

William Gale, co-director of the non-partisan Tax Policy Center, says there may be a short-term bump but he cautions that American companies already have a cash hoard of $1.84 trillion, but they are not investing significantly in growth. “It’s not lack of funds that is stopping companies from investing,” Gale warns.

$1 Trillion from Workers to Corporate Profits

To get at what business leaders intend, an international accounting firm did a confidential survey earlier this year asking corporations how they plan to use tax savings. Their answers undercut the Trump scenario.

Most U.S. multinationals replied that they planned to pass on tax savings to investors through higher dividends and stock buybacks. Only 23% said they would invest in growth, hiring more workers and boosting wages.

Hardly a surprise, since that has been the pattern for two decades or more. Billionaire investor and social critic Nick Hanauer of Seattle points out that corporate boards and CEOs have been fueling U.S. economic inequality by steadily cutting labor’s share of corporate profits and giving a larger share to the corporate elite.

“Over the last 40 years, corporate profits as a percentage of GDP have increased from about 6% to about 11%, while wages as a percentage of GDP have fallen by about the same amount,” Hanauer asserts. “That represents about a trillion dollars a year that used to go to wages, but now goes to shareholders and executives.”

More specifically, the Institute of Policy Studies, a Washington research think tank, found that 48 major U.S. companies used tax write-offs and loopholes to cut their actual tax rates below 20% from 2008 to 2015 but instead of using their low tax rates to hire more American workers, they collectively cut a total of 483,000 jobs.

Most Companies No Longer Seriously Fund Growth

That has been the historic trend. Probably the most damaging evidence undercutting the Trump tax-cut scenario was compiled by economist William Lazonick of the University of Massachusetts. Writing in Harvard Business Review, Lazonick described why the U.S. has been struggling with slow-growth and spelled out why so many economists doubt that corporate tax cuts will generate the new era of high growth that President Trump has promised.

Back in the late 1970s, Lazonick found that major American companies reinvested about half of their annual profits in expanding their businesses, funding R&D, retraining workers and paying them more. Companies paid out the other half of profits to shareholders.

But that pattern has changed dramatically in recent times. From 2003 to 2012, Lazonick found, S&P 500 corporations returned 91% of their profits to Wall Street investors and shareholders in the form of dividends and stock buybacks, but they invested only 9% of profits in their own growth.

“Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back (company) shares for what is effectively stock-price manipulation,” Lazonick concluded.

And what was the impact of that radical shift in corporate strategy? Slower growth, stagnant wages for the middle class, and whopping economic inequality. Economists like Lazonick ask, why should anyone expect that the Trump tax cuts will change that pattern?