Here’s Why Donald Trump’s Tax Plan Won’t Work
There has been a lot of talk about President Donald Trump’s tax plan, even though it’s far from finalized. Some states figure to see a larger share of cuts than others while it could cost the country trillions of dollars. Trump’s inner circle will likely add millions to the coffers, but the common American stands to benefit only a little bit, if at all.
Part of the Trump plan involved cutting corporate tax rates as a way to help the average American, by at least $4,000 according to Trump’s own Council of Economic Advisors. Here are 7 reasons why it won’t work, and 1 reason why it might.
1. Cutting the corporate tax rate doesn’t guarantee higher wages
The CEA report cites several studies indicating workers shoulder anywhere between 21% and 91% of the burden when corporate tax rates are high. The burden comes in the form of lost wages or lost jobs. Slashing the corporate rate from 35% to 20% would funnel money to workers, at least $4,000 per household, according to the CEA, basing that figure on wage growth in other developed countries when corporate tax rates are cut. However, the CEA doesn’t say exactly how this will happen.
The Economic Policy Institute, meanwhile, says the CEA is basing its argument on faulty data. A chart showing wage growth in the countries with the 10 highest and 10 lowest corporate tax rates rankles the EPI, in particular. “It is deeply puzzling just what a graph that shows correlation is supposed to prove about causation. … There is no claim that corporate tax policy changed in those years and hence drove the higher wage growth in low-tax countries,” the EPI writes.
Next: Recent U.S. history provides an example.
2. Things didn’t get better after 1986
The Reagan administration twice passed major tax reforms, first in 1981 and later in 1986 when it slashed corporate tax rates. The thinking was the savings for big companies would lead to higher wages. It’s the well-known trickle-down economic policy. It worked to a degree, but only because Reagan also increased government spending at the same time. In the end, the deficit swelled, and while income did increase the gains were not evenly distributed.
“Trickle-down economics says … lower tax rates should have helped people in all income levels. In fact, the opposite occurred. Income inequality worsened. Between 1979 and 2005, after-tax household income rose 6% for the bottom fifth. That sounds great until you see what happened for the top fifth. Their income increased by 80%. The top 1 percent saw their income triple,” The Balance writes. “Instead of trickling down, it appears that prosperity trickled up.”
Next: Where will the money really go?
3. Extra money won’t be put back into businesses
In an ideal world, cutting corporate taxes leads to higher profits and more investments that allow employees to do better work, then more product, more profits, and, ultimately, more money invested in the workers themselves. This is far from an ideal world. Even when after-tax corporate profits increase it doesn’t necessarily lead to investment back into the company. The Economic Policy Insitute cites data showing corporate profits rose 1.14% from the period spanning 1979-2007 to the period from 2007-2016 (going from 7.31% to 8.45%). During the same timeframes, corporate nonresidential fixed investment (money spent on real estate, hardware, and factories) dropped 2.63% (from 4.72% to 2.09%). The long and short of all that is this: Profits went up, but the extra money didn’t go back to the workers.
Next: Let’s look at a hypothetical.
4. Higher corporate profits don’t lead to higher wages
Let’s say this time is different. Let’s say corporations see bigger numbers on their bottom lines and invest that money back in the businesses. They sell more, they make more money, and, hypothetically, the money makes its way down to the average 9 to 5 worker. That would be fantastic, but history says it won’t happen. Between 1948 and 1973, productivity (output per hour worked) and wages followed nearly the same upward trajectory, according to data compiled by Josh Bivens of the EPI. Since 1973, however, productivity has continued rising while compensation has remained largely steady.
“There is very little reason to think that broad economic evidence indicating a historically weak payoff from cutting corporate taxes for American wage growth will be different in the future,” Bivens writes.
Next: What’s the old saying about what happens when you assume?
5. Positive changes rest on one big assumption
Huge corporate tax cuts leading to noticeable wage increases assumes a massive influx of foreign investment, which assumes the U.S. economy is subject almost entirely to the whims of international markets, writes Josh Bivens of the Economic Policy Institute. But the U.S. is an international economic driver; it’s not just along for the ride. Jane Gravelle, in a report prepared for Congress, writes, “Claims that behavioral responses could cause revenues to rise if rates were cut do not hold up on either a theoretical or an empirical basis.”
Next: Just look at the numbers.
6. Historically, the numbers don’t add up
As the Council of Economic Advisors notes, the paths of corporate profits and employee wages diverged in the late 1980s, not long after Reagan cut the corporate tax rate from 46% to 40% (it later dropped as low as 34%). Since 1993, the corporate tax rate has been 35%, but only four times since then have worker wages increased by more than 1% year over year, the last time in 2010. The CEA believes this time will be different. Josh Bivens of the Economic Policy Institute doesn’t buy it. “Prior to 1990, worker wages rose by more than 1% for every 1% increase in corporate profits. From 1990-2016, [it] was only 0.6%, and … from 2008-2016, only 0.3 percent. The profits of U.S. multinationals … increasingly … do not accrue to U.S. workers,” Bivens writes.
Just look at the recent separation between the haves and the have-nots. The Balance notes that by 2006, 33 million workers made less than $10 per hour. From 1979 through 2007, the richest 1% enjoyed a 275% increase in income; the bottom 5% of earners saw an increase of only 18%.
Next: One guaranteed way worker wages will increase.
7. Most workers don’t have a seat at the table
One big key to boosting wage growth for average American workers is simple: Giving them a voice at the bargaining table. It sounds simple, but it’s not. Years of shifting dynamics have corporations holding most of the bargaining power when it comes to negotiating wages and other benefits, and it’s not getting any better. Union membership, which through collective bargaining helps the workforce earn a fair share of the profits, is down to an all-time low. Just 10.6% of the U.S. workforce in 2016 was part of a union. In 1983, it was 20.1% in 1983, according to the Bureau of Labor Statistics.
Next: All hope is not lost.
8. Still, there’s a chance the plan could work
As we’ve seen, cutting corporate tax rates does not guarantee better wages for the common worker, but trying couldn’t hurt. The United States ranks dead last, No. 35 overall, for corporate tax rank on the Tax Foundation’s International Tax Competitiveness Index. Countries like Estonia, Latvia, Mexico, and Canada rank higher.
The U.S. is still by far the largest economy on Earth, but maybe not for long. The World Economic Forum expects China’s rapidly growing economy to be No. 1 in the world by 2050, when the U.S. is expected to be third, behind India. As his Twitter history shows, Trump is typically more reactive than proactive, but maybe this is a pre-emptive strike he’s engineered to keep the U.S. as a major player on the world stage for years to come.
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