Editorial of The Times
Posted January 27, 2018 7:47 p.m. EST
Tax Cuts Do Raise Pay, for Bosses
Recent announcements by Apple, Walmart, AT&T, Starbucks and other businesses that they are giving workers raises, repatriating foreign profits and investing in the United States because of the tax bill Congress passed last year are clearly music to the ears of President Donald Trump and Republican lawmakers. But these statements are also cleverly designed public relations spin that tells us little about the actual long-term economic impact of the tax law.
Let’s put some context around these corporate proclamations. The economy is humming, with the unemployment rate at 4.1 percent. This is, of course, very good news. But beware the spin: Regardless of what’s in the tax overhaul, businesses have an incentive to raise wages to retain and attract workers because of the tight job market. It is also very much in the political interest of companies to attribute to the new tax law the changes they make to salaries or investment plans. That’s a surefire way to win favor with Trump, a notorious sucker for flattery. And it is a way to deflect attention from the insidious aspects of the tax law: It will add about $1.5 trillion to the federal deficit over 10 years, and many poor and middle-class families will pay more taxes over time.
It’s the corporate elite who stand to benefit most from the tax law. Lloyd Blankfein, the Goldman Sachs chief executive who supported Hillary Clinton in the 2016 election, told CNBC recently that he “really liked” what the president is doing for the economy.
The Republican tax law has slashed the federal corporate tax rate to 21 percent, from 35 percent. The Trump administration has argued that this cut will translate into big raises for workers, but many economists say that most of those gains will actually flow to shareholders and top executives. Take Walmart. The company says it will spend $700 million on bonuses and higher wages for cashiers, drivers and other hourly workers. That’s a tidy sum, but the company is spending far more — $4 billion — to buy back its stock, which will benefit its investors by raising the share price. And it is worth keeping in mind that Walmart also raised wages when tax rates were higher under President Barack Obama.
Apple says it is repatriating most of the $252 billion of cash it holds abroad by making a onetime tax payment of $38 billion to the federal government. The company also has promised to create 20,000 jobs and build a new campus. This sounds great. But thanks to the Republican tax law, Apple will pay at a fraction of the tax rate on its foreign profits that it would have paid at under previous tax law — just 15.5 percent on profits held as cash and 8 percent on earnings held in nonliquid assets like real estate and equipment. It is hard to believe that lawmakers made the right call by giving Apple and other multinational companies this huge tax break. Research has shown that a 2004 law allowing companies to bring foreign profits home at a discounted tax rate did little to boost investment or create jobs and that most of the tax savings went to shareholders.
In cutting the corporate tax rate, Republicans have argued that the 35 percent rate was holding U.S. businesses back relative to foreign competitors. This is hard to square with the fact that companies based in the United States have prospered in recent decades. Apple, for example, has become one of the world’s most valuable companies and went from employing 5,000 people in the United States in 1998 to employing 84,000 this year.
There’s nothing wrong with cutting taxes on corporations as part of a broader reform that closes loopholes, increases U.S. competitiveness and helps create well-paying jobs. Unfortunately, none of those conditions apply in this case.
As many experts have pointed out, corporate tax cuts passed by Congress and signed into law by President Ronald Reagan in the 1980s did not turbocharge wages or investment. Similarly, a series of corporate tax cuts in the last 10 years or so by Labour and Conservative governments in Britain — to 19 percent, from 30 percent — did not produce a boom in wages or investment. In fact, wages grew faster in the United States, according to an article on Vox by Kimberly Clausing, an economics professor, and Edward Kleinbard, a law professor.
It’s great that after decades of anemic wage growth, some workers are finally getting a raise. But if Trump and the Republicans in Congress were serious about helping workers via the tax code, they had obvious options open to them: They could have cut taxes on the middle class and expanded the earned-income tax credit for poorer workers. Instead, they chose to write giant checks to big investors on the accounts of future generations.
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