Tax Cuts: Rising Tide That Lifts Some Boats

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act after approval of the bill by the Senate and the House of Representatives on December 20, 2017. Thus the most significant tax changes since the Reagan years were enacted. Ever since, the “tax cuts” have joined the growing list of subjects that elicit a great deal of hand wringing from just about everybody.

Rather than post yet another laundry list of what the Tax Cuts and Jobs Act says, here is a brief review of what has happened since the bill became law that might interest workers.

* Job Creation:

At the beginning of May 2019, the unemployment rate stood at 3.6%, lowest level since the 1960s, indicating that companies are creating jobs and hiring workers. The long-term trend since well-paying manufacturing jobs vanished continued, and most growth occurred in low-paying sectors. A lot of hand wringing from our legislators culminated in Senator Chuck Schumer’s sudden concern about “income inequality” as associated with the tax cuts, when the rich have been getting a lot richer for years.

* Wage Growth:

January 2019 posted a real wage gain of 1.7%, and a nominal gain of 3.2%. Real wage figures are adjusted for inflation, while nominal wage figures are not. Lower-paid workers saw the highest gain, around a quarter to a third of that gain probably due to new minimum wage laws and the rest due to job growth that requires employers to pay more to attract workers. The 1.7% figure is a nice gain from 2018, but not much different than year-over-year figures since the 1960s. In other words, in-spite of astronomical rises in the prices of goods in major U.S. cities, real wages have been downright stagnant. The hand wringing comes in again when legislators so concerned about the rich getting richer want interest rates to remain low, which means stock prices remain high, creating wealth mostly for those who can afford stocks (of course, low interest rates “benefit” the poor and middle class, since low rates facilitate more consumption based on a sea of debt).

Pew Research Center:  For Most U.S. Workers, Real Wages Have Barely Budged in Decades.  August 7, 2018.Real and nominal wages

* Company Profits:

The tax cuts lowered the corporate tax rate from 35% to 21%, in hopes employers would make capital investments, hire more workers, and increase workers’ pay. That is not what usually happens. Blessed with a windfall such as the 2017 tax cuts, major corporations usually benefit their shareholders first with investments such as stock buybacks and generous bonuses. Capital improvements that can increase productivity and worker benefits trickle down eventually, though. Such facts did not prevent major hand wringing from the mainstream media when the usual corporate behavior occurred after the 2017 tax cuts.

* Growth of Gross Domestic Product:

The Gross Domestic Product (GDP) is the total value of all end-product goods and services in the country, including personal consumption, business investment, and government spending on goods and services (welfare payments and interest on the national debt are excluded). The U.S. real (adjusted for inflation) GDP growth rate for 2017 was 2.27% and estimated for 2018 2.80%. For comparison, the real GDP of our two neighboring countries are: Canada 3.05 for 2017 and 2.00 estimated for 2018. Mexico 2.04 for 2017 and 2.10 estimated for 2018.

A healthy GDP is thought of as the tide that lifts all boats. However, sometimes the rise is perilous enough to endanger the people in the boats or uneven enough that some boats get lifted more than others.

At present the U.S. national debt to GDP is hovering on the perilous. That is because legislators, in their effort to get re-elected, want to make the U.S. economy look good, regardless of underlying financial land mines. Deficit spending that keeps adding to the national debt is the financial land mine of our time.

Debt to GDP

Theoretically, as GDP grows so does the wealth of a country’s citizens. However, wages of lower and middle-income workers are stagnant, while the asset-based wealth of the rich is growing. Nobody dares talk about the growth of monopolies – they are too big to annoy.  Nobody dares do much about the “plantation” into which lower-income folks have been assigned – keep the plantation denizens dependent and they will deliver the vote.

In Summary:

The 2017 tax cuts gave a good boost to the U.S. economy.  Workers are finding jobs.  Lower-income folks take home a little more on pay day than they did before the tax cuts.  U.S. companies have more after-tax money that could trickle down to workers once stockholders are appeased.  To the ire of profligate states like California, federal deductions for astronomical state and property taxes are now limited (as an aside, most workers in expensive states like California rent their home, and thus do not have property tax deductions).

The eye-popping downside of the tax cuts is that they will add to the already significant national deficit (the U.S. spends more than it takes in revenues).  By October 2018, the deficit grew to $779 billion, a 17% increase over 2017.  Deficits end up being paid by borrowing, just like in any household.

The unfortunate downside is that tax cuts — any tax cuts — act like a band-aid.  The economy gets a boost and the political faction that brought about the cuts can hope for votes if all goes well.  Meanwhile the underlying variables that support monopolies, stagnant wages, income inequality, and perilous government borrowing remain untouched.