Data continues to show little evidence that tax cuts are trickling down to typical workers, and now House Republicans want a do-over
In December, when Republicans passed the Tax Cuts and Jobs Act (TCJA) they chose to make tax cuts for corporations permanent, while making the individual provisions temporary to satisfy the requirements of budget reconciliation. Republicans sold these corporate tax cuts as being beneficial to everyday working people, despite the fact that previous experience gives us no reason to believe that corporate rate cuts will trickle down to anyone.
Some willing allies in the corporate world, eager to bolster the case for tax cuts, tried to hoodwink workers into believing that any bonus a worker received in 2017 was due to the TCJA. But the economic theory behind the idea that corporate rate cuts lead to higher pay for typical workers does not say that those wage increases would occur immediately (and certainly not before the tax cuts came into effect). Instead, wage bumps for workers, if they come at all, would come only after a long chain of economic events were triggered by the cut. One of the first of these events should be increased investment. We’ve long pointed out that there was reason to believe that nearly every link in this chain would break down, and that the theory itself is inconsistent with the reality of the larger deficits caused by the TCJA.
Now that the tax cuts have passed and enough time has gone by to allow some data to trickle in, is there any reason for us to change this judgement? Not really. There’s still no indication in the data that the TCJA has spurred investment—the necessary but by no means sufficient precursor to wage gains. Sure, owners of corporate shares have made out like bandits. The most recent release from the Bureau of Economic Analysis (BEA) shows that domestic after-tax corporate profits remain high, 7.5 percent of GDP in the second quarter of 2018 compared to 7.4 percent in the first quarter of 2018 and up substantially from already-high levels (6.7 percent) in 2017. Revenue collected from domestic corporate taxes remains low, 1.2 percent of GDP in the second quarter of 2018 compared to 1.1 percent in the first quarter of 2018 and 1.8 percent in 2017. Finally, undistributed domestic corporate profits – corporate profits kept internal to the firm and not distributed back to shareholders as dividends—remain historically high. This is due to the windfall the TCJA contained for multinational corporations on the profits they booked offshore. These undistributed profits (available to finance share buybacks) constituted 8.9 percent of domestic corporate gross value added in the second quarter of 2018 compared to 13.7 percent in the first quarter of 2018 and 2.6 percent in 2017. In short, the direct effects of the TCJA are here and totally visible in the data: swollen corporate profits.
But the rapid surge in investment promised by proponents of the TCJA has still yet to materialize. Initial data for the second quarter of 2018 showed year-over-year growth in real private nonresidential fixed investment roughly unchanged from the first quarter of 2018. Revised data increased that growth rate slightly to 7.04 percent in the second quarter of 2018 from 6.74 percent in the first quarter of 2018, but the data still doesn’t show a clear boost to the trend of investment that would indicate a positive effect coming from the TCJA. The graph below shows year-over-year increases in non-residential investment since 2007—do the last two data points look like a game-changer?
With the corporate rate cuts they chose to make permanent failing to trickle down, Republicans would like to try one more time, unveiling a plan that is likely to be voted on in the House this month. “Tax Reform 2.0” offers up a distorted view of parity, where regressive permanent corporate tax cuts will now be coupled with also-regressive permanent individual tax cuts. If parity between corporate and individual income tax cuts was really so important to the Republican majority, it could be restored simply by repealing the egregiously regressive corporate rate cuts. In the end, the Republicans are hoping to solve a political problem—the unpopularity of their signature tax cut in 2017—by giving away even more money to the very top of the income distribution while marketing it as an everyman’s tax cut.
Finally, it’s important not to lose site of the endgame. According to the Congressional Budget Office, the TCJA will increase the deficit by $1.9 trillion over 2018–2028. Increased deficits themselves aren’t currently an economic concern, but we warned before the passage of the TCJA that Republicans would seek to leverage the increased deficits it caused to claim that cuts were necessary for programs that working people rely on. At the time, Republicans were already tipping their hand. And after passage, House Budget Chairman Steve Womack (R-Ark.) released the House GOP budget, with the ludicrously hypocritical statement that “there is not a bigger enemy on the domestic side than the debt and deficits.” That budget included deep cuts to education, public investment, Medicare, Medicaid, and the Affordable Care Act. The Tax Policy Center estimates that the new “Tax Reform 2.0” would increase the deficit by $3.8 trillion over 2026–2038, while House Republicans continue to make clear that the strategy of leveraging these deficits to build support to slash valuable spending programs hasn’t changed.
This second round is being marketed as a fix, but all it would do is lock in regressive tax cuts for generations to come. And with no evidence that their corporate tax cuts are helping ordinary people, congressional Republicans shouldn’t be allowed to sell regressive tax changes as “tax reform” again.