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Opinion Inconvenient facts about the tax cut

Internal Revenue Service 1040 individual income tax forms. (Michael Nagle/Bloomberg)

CNBC reports: “Corporate buyback announcements have surged in the weeks since President Donald Trump signed a sweeping corporate tax overhaul into law.” And Democrats have noticed: “Senate Democrats launched a new line of attack on the Republican tax plan Wednesday in a report showing companies have announced $97.2 billion in share buybacks since the start of the year. That figure dwarfs a number that Republicans have been touting: $2.5 billion in bonuses that companies have announced in response to the new tax law.” By comparison, there were 58 companies at this time last year that had announced $40.3B in stock buybacks. But don’t take Democrats’ word for it:

The buyback list compiled by Democrats also mirrors data from independent money management and research firm Birinyi Associates. It found 61 companies have spent $88.6 billion in share repurchases so far this year, more than double the amount announced by 58 companies during the same period last year.
That makes 2018 the second-busiest year in buybacks since the bull market began in 2009, the firm found.

Each employee who gets a bonus check is grateful, but one does get a glimpse from these figures as to how poorly this supposed “middle-class tax cut” was designed. If nearly $100 billion go for stock buybacks and $2.5 billion go for bonuses, then workers are not — as the White House has repeatedly claimed — going to get the majority of the money flowing from the corporate tax cut. Not even close. The corporate tax cuts, at least so far, have overwhelmingly rewarded shareholders (including senior executives who own stock).

Multinational corporations’ announcements intended to ingratiate themselves with Trump (and perhaps distract from the enormous stock buybacks) don’t tell us about the big-picture impact of the tax cut. For one thing, as the Associated Press reports: “It’s worth noting that many of the big corporations gave one-time bonuses, not permanent raises. So if the tax cut turns out to be less of a boon than expected, or the companies have a bad year, they’re not committed to higher compensation going forward.”

If we look to small business, the picture is a lot less clear. The Associated Press reports:

Small business owners may want to hand out bonuses and raises now that there’s a new tax law, but many don’t know if they’ll have any wealth to share. . . .
Big companies also have an advantage because they have billions of dollars in cash reserves. Small and mid-size businesses often don’t have such cushions or access to big lines of credit that can help pay operating costs if revenue slows. Giving bonuses or raises in response to a potential tax cut could leave smaller companies vulnerable to a cash flow crisis.
Even when tax professionals have more clarity about the law, small and mid-sized companies are likely to hold off. Owners typically give raises at the end of the year or early in the new year, after they have assessed how employees and the company overall have performed. If owners have a sense of what their revenue and profits will be in the year ahead, that goes into the mix as well.

If you wanted to make certain the middle and working classes got the lion’s share of the tax cuts, you wouldn’t have devised it the way the Republicans did. You wouldn’t have reduced corporate taxes by about $1 trillion (or about two-thirds of the plan’s $1.5 trillion price tag), or given the wealthy a tax break or set up a new pass-through rate. You might have instead have championed a payroll tax cut, a larger child tax credit and/or a more generous Earned Income Tax Credit. In other words, how much of the tax cut winds up in the pockets of workers remains to be seen.

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There are two other factors to keep an eye on, both of which suggest the tax plan could have been better designed to produce growth and wage increases.

First, the Congressional Budget Office released a report on historically low labor-participation rates. That’s a nagging concern that keeps growth and incomes down:

The lingering effects of the 2007-2009 recession and the ensuing weak recovery held down the labor force participation of people ages 25 to 54 and will continue to restrain participation slightly through about 2020, in CBO’s view. At that time, CBO estimates, the labor force participation rate of people ages 25 to 54 will be close to its potential rate (that is, the percentage of the population who would be employed or seeking work if the economy was producing its maximum sustainable amount of output), indicating that most of the effects of the recession will have subsided.
The slow recovery of the labor market largely reflects lackluster demand for goods and services and hence slow growth in GDP.

What would help raise labor participation rates? Not corporate tax cuts, to be sure. The CBO’s report added: “The recovery of labor force participation following the 2007-2009 recession has been especially slow. Some fiscal policies, such as the earned income tax credit (which subsidizes the earnings of certain low-income workers), tend to increase labor force participation whereas others, such as the Social Security Disability Insurance program, are associated with lower labor force participation.” Unless labor-participation rates go up, we’re unlikely to return to robust growth.

Another CBO report said: “The federal budget deficit was $174 billion for the first four months of fiscal year 2018, the Congressional Budget Office estimates, $16 billion more than the shortfall recorded during the same period last year. Revenues and outlays were higher, by 4 percent and 5 percent, respectively, than during the first four months of fiscal year 2017.” Once new spending levels kick in, prepare to see those deficit numbers increase. If allowed to continue, that accumulated debt will dampen growth, which in turn will depress employment.

In short, the administration’s obsession with temporary bonuses is a political tactic that tells us little about the effectiveness of the tax cuts. For now, the vast percentage of the corporate tax cuts are flowing to shareholders. Moreover, we will continue to face challenges from low labor participation rates, a rising debt and inflation fears. All of that is to say, giving rich people and corporations big tax cuts isn’t going to solve our economic challenges. It will however use up an awful lot of borrowing and reduce the tools at our disposal if we tip back into a recession.