Michael Meeropol: The Facts About The GOP Tax Cut

Jan 5, 2018

When the Republicans claim that the tax bill they just passed will be a great Christmas gift to American workers and members of the middle class, they are being cynically dishonest.   Everyone knows, correctly, that the major gifts are for high income taxpayers and large corporations.

For details see Russell Berman,  “What's in—and Out of—the Final Republican Tax Bill,”  In my last commentary, I noted that the worst change was permitting individuals to redefine themselves as businesses to take advantage of the major cut to so-called pass through income.   In addition, of course, there is the large reduction in the estate tax and the permanent cut in corporate income taxes to 21%.

An economist friend Dean Baker, has just written a most informative piece for the Huffington Post:  Corporations Are Trying To Sell The GOP’s Narrative On Tax Cuts (December 21, 2017)

In it, he notes that some large corporations are trying to help the Republicans argument that the tax cut will boost wages by announcing one time bonuses and other pro-worker changes.

“AT&T announced that it would give a one-time bonus to $1000 to 200,000 workers. … Comcast also promised a $1000 b onus for 100,000 workers.  Fifth Third Bancorp promised a $1,000 bonus for 13,500 employees, while raising its minimum wage to $15 an hour. Wells Fargo said it would raise its minimum wage to $15 an hour, too. Boeing announced a $300 million fund to be spent on training workers, upgrading facilities and matching workers’ charitable contributions.

While the employees getting these increases will undoubtedly be pleased, there are a few caveats that must be kept in mind.

First, many of these announcements refer to one-time bonuses, not permanent pay hikes. This is not what the GOP promised. The corporate tax cuts were made permanent on the grounds that companies needed the expectation of higher future after-tax profits in order to justify greater investment today. If the economy is following the course predicted by the Republicans, all these pay increases should be permanent, too.”

Baker argues, however, that the most significant point is that “… these pay hikes are not especially large relative to the size of the corporate tax cut. Take the example of AT&T: In 2016, the company reported operating income, net of interest, of $19.4 billion. It paid $6.5 billion in taxes, which means an effective tax rate of 33.5 percent.

If it had instead paid the 21 percent tax rate in the new bill, AT&T’s savings would be $2.4 billion. The promised bonus for 200,000 employees comes to $200 million, or less than one-tenth the size of the tax cut. This is very much in line with the expectations of tax bill critics, who predicted that the overwhelming majority of the money that corporations now get to keep will end up as higher profits paid out to shareholders, not as permanently higher wages for workers.”  (I, Meeropol, added this emphasis.)

Baker concludes that “… the real question is not the immediate split between wages and payouts to shareholders. The Republican story of tax cut blessings rests on a great surge in investment. We should begin to know if that is going to happen very soon. After all, companies were obviously following the tax cut debate over the last two months and presumably began to make plans as to what they would do if the bill passed.

So if there is going to be the huge upsurge in investment predicted by tax cut supporters, it should be showing up in the data on orders for capital goods almost immediately. And it should be a very large upturn, not just the normal increase to be expected in an economy that has been strengthening for the last eight years.

Until we get those data, we have little basis to judge whether the tax cut will deliver the economic growth and pay increases the Republicans said would happen. This display of corporate beneficence to workers and communities is nice, but it has to be understood as part of a public relations campaign. It tells us nothing about whether the tax cut will ultimately deliver to workers the gains promised by its proponents.”    (end of quote from Baker)

So it is definite.  The tax cuts are aimed at making the rich richer and the superrich even more super.  However, we have to recognize that the Republicans slipped in some goodies to “sell” the benefits of the tax bill to the non-rich – at least for next year and for a few years after.  Thus, I believe that those who oppose the tax cut make a serious mistake if they emphasize tax increases for the middle class.

This is because the rise in the standard deduction and the increase in the child tax credit --- TEMPORARY as it is – might very well show up in pay stubs over the next few months as an increase in after-tax income.   It is true it won’t be much and beginning in 2019, some of these cuts will expire leading to a net increase in taxes for over 50 percent of Americans within ten years.  But this is the diabolically clever part of the Republican plan.  

As long as they can point to even small tax cuts for working Americans in 2018, they expect to benefit in the 2018 election.   Furthermore Trump will be able to claim that he “delivered” on his campaign promise of focusing tax cuts on the middle class.   Even though that is totally untrue, he hopes to ride the increases in take-home pay that will show up in lower 2018 withholding rates and a slightly lower tax burden on middle income Americans during the 2019 and 2020 tax season all the way to re-election later in 2020. 

In addition, the Republicans also just got lucky.   The head of steam the economy finally built up in 2016 – remember, before Trump took office -- which has continued through 2017 could lead to rising wages.  After a very disappointing seven years of recovery from 2009 through 2015, 2016 and last year were good years.   Unemployment had bottomed out at 4.4% before the onset of the Great Recession at the end of 2007.   After six years of recovery at the end of 2015, unemployment stood at 5%.   It fell to 4.7% by the end of 2016 and was 4.1% in 2017.

[Some folks might recall that candidate Trump claimed the unemployment figures in 2016 were wrong and that “real” unemployment was closer to 20%.   Once he took office, he officially decided that the rates measured in 2017 were in fact correct.   So if his ridiculous statements were literally true, the economy went from 20% unemployment at the end of October of 2016 to 4.7% unemployment in January of 2017.]

The rate of growth of the economy has remained relatively modest – but the length of the recovery coupled with the decline in unemployment may finally lead to rising wages.

The Republicans will then falsely claim that the tax cut caused those increases and no doubt emphasize the examples described by Baker in his article.

The idea behind the Republicans’ cynical ploy is the view that Americans don’t really care about inequality so long as their own personal incomes rise.   I disagree.  I believe that a growing percentage of the population actually cares that inequality has increased dramatically for almost 40 years (yes – forty years!!) --- that the median income (that means typical) of year round full time male workers has been basically stagnant for most of that period.   (Women’s median income has risen dramatically but still is $10,000 lower than that of men.)

I hope this belief in basic fairness overrides the positive individual response to an increase in take-home pay in February’s pay stub.   You can bet that Republicans will be all over the airwaves trumpeting the examples of  rising take-home pay reflecting some of the benefits of this tax cut.  

Many of us are disgusted by the giveaway to those who already have too much (I am specifically referring to Senator Corker and the extended Trump family who have millions of dollars in real estate assets who just got a big tax break slipped into the bill at the last minute.  This last minute goodie extended the benefits for pass through businesses to real estate partnerships.  [See Ian Salisbury, “People Are Outraged About the GOP Tax Bill's 'Corker Kickback.' This Is Why.”  December 18, 2017, on the Yahoo-Finance website ] Quoting from the article:

“The deduction [for pass through businesses] had originally been designed to exclude businesses like real estate partnerships, which often have few employees.  Late in the game, however, the joint bill changed in a way that would allow owners of real estate businesses to claim the deduction alongside other business owners, according to the International Business Times.  The publication also pointed to several real estate partnerships Corker has stakes in and estimated the tax bill could save him more than $1 million.”   The Trump organization would benefit even more, of course.)

It is essential that those of us disgusted by this giveaway not emphasize the fact that many middle class people will see tax increases by 2025.   That’s too far in the future. The typical voter will be looking at how he or she is doing in 2018 and 2019 as they prepare to vote in the next Congressional and Presidential elections.   We must acknowledge the cynically dishonest nature of the Republican tax bill.  They gave crumbs to the middle class while giving whole sheet cakes to the super-rich—We can acknowledge that the crumbs exist but urge our fellow citizens to look past those crumbs to the long term damage to our country.

And no, I do not believe the rise in the National Debt over the course of the next ten years is a bad result of the tax bill.  I have discussed this issue so often in these commentaries that it should not bear repeating.   I have consistently argued that deficit spending is rarely a bad economic policy – that criticisms of deficit spending are just ways of fighting to cut government spending on programs the speaker doesn’t like.   Attacking deficits is a dishonest way of attempting to cut government spending.   The so-called fear of deficits miraculously evaporates whenever the goal is rising military spending or cutting taxes on the wealthy.   Democrats fall into a trap when they attack deficit spending.   If they do this, then when they get into power they have to cut spending or raise taxes --- which harms them politically.

(My book SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION deals with this issue at length.)

The major damage to our society and economy will be the increase in inequality.   In addition, over this coming year, the rising federal budget deficit will give the Republicans an excuse to attempt what they euphemistically call ENTITLEMENT REFORM.  Whenever you hear those words, watch out.  That means they are once again going after Medicare, Social Security and Medicaid.  

One of the little noticed changes in the tax bill is the change in the price index used to adjust brackets.   If the brackets (income levels where one shifts from, say, a 15% tax rate to a 20% tax rate) do not move upwards when inflation occurs, people could find themselves in a higher tax bracket with no increase in real income (all the nominal income increase being used up paying higher prices).   Before 1984, brackets did not move with inflation – now they do automatically.   The change in the tax bill, lowers the rate at which brackets move.  Compared to current law, this will cost taxpayers a lot of money over the next 30-40 years.   Congress could claim that they are just measuring inflation more accurately by replacing the current inflation rate for calculating increases in social security pension payments with the lower one now being used to index tax brackets.  The result will be the same a cut to social security payments which will mount up significantly over a 20 year retirement period.

And of course the Republicans might resurrect the old canard of “premium support” which was an effort to privatize Medicare in one of the early versions of the Paul Ryan budget that the Republican House of Representatives passed during the Obama years.

Those who opposed the tax cut must emphasize the danger of the various “entitlement reform” proposals that are bound to be presented sometime this year or next (if the Republicans retain control of the House) as the budget deficit grows.   Focusing on potential increases in taxes ten years from now is a losing strategy.  Instead, we have to emphasize the hopes for alleged “entitlement reform” by the Republicans using rising deficits as their excuse.   We have to also remind our fellow citizens that rising inequality is a danger to the entire future of our society.  

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.

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