Intellectually honest conservatives are warning the White House and GOP Congress not to hype the one-time bonuses that multiple corporations have announced as evidence of their brilliance in passing tax reform. Alan Viard from the American Enterprise Institute supported the tax bill but says linking it to bonuses is wrong:
Even if the bonuses were prompted by the corporate rate cut, they are merely one-time steps taken by a limited number of companies for public relations purposes. Such steps look nothing like the long-lasting, economy-wide wage gains arising from the self-interested responses of companies to the investment incentives created by the tax rate reduction. Supporters of the corporate rate cut should focus on those long-run gains rather than tying their case to the short-lived corporate public relations initiatives. …
The timing of the bonuses makes clear that they do not fit the economic theory’s depiction of productivity-driven responses to the tax cut. The one-time bonuses give workers extra money now, although it is too soon for the tax cut to have increased investment and raised productivity, but offer workers nothing in upcoming years, when the tax cut would have had time to push up productivity.
He acknowledges the bonuses may be nothing more than an attempt to “curry favor with the Trump administration.”
Almost immediately we have some factual support for Viard’s skepticism. CNBC reports, “Despite a handful of high-profile announcements, the recent cuts in corporate taxes haven’t yet had a meaningful impact on American companies’ plans to boost investment or raise workers’ pay, a CNBC survey of large companies found. … Only 9 companies in the S&P 100 contacted by CNBC said they have specific plans to use some of the money saved from the corporate tax cuts to boost worker pay or invest in facilities or charitable causes.”
The actual argument for corporate tax cuts advanced by the administration was that the tax cuts would spur capital investment, thereby raising productivity and allowing them to raise wages. (Viard explains, “According to economic theory, a corporate tax rate reduction raises wages by boosting investment and productivity. … Reducing the tax rate on a company’s taxable income gives it an incentive to earn more taxable income by expanding their factories, equipment, and other business capital in the United States. It is in a company’s self-interest to expand their U.S. investments because the rate cut lets them keep more of the profits of those investments.”) Obviously, none of that has had time to happen. Moreover, it is far from clear that it will happen.
There has been a healthy debate as to what portion of the tax cuts will accrue to workers and what portion to shareholders. If we are going to count bonuses and wages, we should also track dividend increases and stock buyback schemes. That would at least provide a complete picture of how the tax benefits are being allocated. Moreover, we would need far more data about how wages and bonuses are being allocated. As you may know, the gap between CEO pay and average worker pay is massive. If the tax cuts mean companies are paying CEO’s big bonuses (these are the very people who also get the lion’s share of the tax relief, by the way) and handing out big raises, the notion that this was all about the middle class will take another hit.
The tax plan should be evaluated according to the administration’s own selling points. Does it create more jobs than we already would have? Does it boost middle-class wages and not accentuate growing income inequality? Do companies relocate plants to the United States? Does it pay for itself? We won’t know for some time how this pans out, and hopefully by then Trump will be long gone.
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