by From David Ruccio The premise and promise of the Republican tax cuts—officially, the Tax Cuts and Jobs Act—are that lower corporate taxes would lead to increased investment and thus more jobs and higher wages for American workers. We all knew at the time that the logic was a sham. As I explained last August, one of the likely outcomes of the kind of corporate tax cuts Donald Trump and his fellow Republicans supported—and, as we saw, eventually rammed through—would be an increase in inequality. That’s because, since corporations aren’t facing any kind constraint in profits or their ability to borrow beyond their current profits, we likely wouldn’t see more investment, but instead some combination of more mergers and acquisitions, more payouts to shareholders, and more distributions of
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from David Ruccio
The premise and promise of the Republican tax cuts—officially, the Tax Cuts and Jobs Act—are that lower corporate taxes would lead to increased investment and thus more jobs and higher wages for American workers.
We all knew at the time that the logic was a sham. As I explained last August, one of the likely outcomes of the kind of corporate tax cuts Donald Trump and his fellow Republicans supported—and, as we saw, eventually rammed through—would be an increase in inequality. That’s because, since corporations aren’t facing any kind constraint in profits or their ability to borrow beyond their current profits, we likely wouldn’t see more investment, but instead some combination of more mergers and acquisitions, more payouts to shareholders, and more distributions of the surplus to CEOS.
More recently, I explained that inequality would also increase because corporations would likely use a portion of their higher profits to engage in stock buybacks, leading to an increase in stock prices. And stock ownership in the United States is already grotesquely unequal. Therefore, the rise in equity prices would disproportionately benefit the small group at the top of the wealth pyramid. And that’s exactly what is happening.
And that supposed increase in workers’ wages? Well, as it turns out, as Jeff Stein and Andrew Van Dam have shown, the hourly wages of regular (i.e., production and nonsupervisory) workers have actually fallen over the course of the past year. For those workers, average “real wages”—taking into account inflation—fell from $22.62 in May 2017 to $22.59 in May 2018.
As if that’s not enough to debunk the ludicrous claims of Trump, his economic advisers, and the Republicans who voted en masse for the tax cuts, there’s now an additional reason to cast doubt on the jobs and wages part of the selling of the tax cuts: close to 40 percent of multinational corporate profits are artificially booked in tax havens each year.*
That’s the conclusion of recent research by Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman. And U.S. companies are among the most aggressive users of profit-shifting techniques, which often relocate paper profits without bringing jobs and wages. The research suggests the global trend toward lower corporate tax rates in major countries—including the recent U.S. reduction to 21 percent from 35 percent—won’t cause companies to alter their tax-avoidance moves. U.S. companies can still lower their tax bills significantly by shifting profits to places with effective tax rates between zero and 10 percent.**
It also means that cutting corporate tax rates, as the United States did at the end of 2017, is not likely to generate the positive effects on jobs and wages that the Republicans and the textbook economic models suggest. As Tørsløv et al. explain,
For wages to rise, productive capital needs to increase, which can happen fast if capital flows from abroad, much less so if paper profits—not productive capital—is what moves across countries. Second, profit shifting raises new challenges for tax policy. It reduces the effective rates paid by multinationals corporations compared to what local firms pay.
The fact is, the U.S. corporate tax cuts are a gigantic tax giveaway—to large corporations and the super rich—with no benefit to workers, even according to the trickledown logic of Trumpian economics.***
Clearly, the tax cuts are not about making America or American workers great again. In both design and implementation, they’ll only benefit employers and the tiny group of already-obscenely wealthy individuals at the top.
*”Multinational profits” include all the profits made by, say, Apple in France, Germany, Ireland, Jersey, and so on, but not by Apple in the United States (where its headquarters are located).
**Another implication of profit-shifting is that headline economic indicators—including Gross Domestic Product, corporate profits, trade balances, and corporate labor and capital shares—are significantly distorted. That’s because the flip side of the high profits recorded in tax havens is that output, net exports, and profits recorded in non-haven countries are too low.
***The Congressional Budget Office has concluded that, although the 2017 tax act includes a number of provisions that discourage profit shifting, it may encourage some additional profit shifting by exempting foreign dividends from U.S. taxation. On net, it projects the changes in tax law may reduce profit shifting by roughly $65 billion per year, on average, over the next 11 years. The CBO does note that “the effect of the tax act’s international provisions on profit shifting by multinational corporations is particularly uncertain”—because of the provisions’ complexity and because foreign governments might change their tax rules in response to the act. They should also have noted that any increase in booking profits in the United States rather than abroad represents a transfer of paper profits, not financial or productive capital.