Freeing corporate profits from their fair share of taxes is not the deal America needs
There’s obviously plenty to criticize regarding Donald Trump’s claims and characterizations about the problems facing the U.S. economy during last night’s debate. But one thing that stuck out clearly was his peddling the myth that profits of U.S. corporations are “trapped” offshore by U.S. tax policy, and that these profits “can’t” be returned to the United States “until a deal is struck.” Now, Trump’s presentation of this argument during the debate was a characteristic dumpster fire of incoherence, but on the substance he was actually just trying to explain what has become a depressing conventional wisdom.
So, let’s provide a quick explainer about why these profits are not “trapped” abroad and why the only deal that needs to be cut is closing a loophole in the U.S. corporate income tax.
This loophole allows U.S. multinational firms to defer paying the corporate income tax on profits earned overseas until these profits are “repatriated,” or returned to shareholders in the United States. By now, about $2.4 trillion in profits sits offshore, and there would be about $700 billion in taxes if it were repatriated. Obviously this deferral is a huge deal.
September Fed decision was the right one for communities of color
At the conclusion of their most recent meeting, the Federal Open Market Committee (FOMC) decided against a September interest rate hike. Their decision is consistent with conclusions drawn in a recent analysis by our colleague Josh Bivens. Using the Fed’s own economic projections and other historical data, he makes the case that even a small increase in interest rates is far more likely to slow the economy and deter progress in reducing unemployment than holding interest rates steady is likely to trigger accelerating inflation. Their decision also lets jobseekers breathe a temporary sigh of relief—particularly people of color, who have seen the strongest labor market gains over the last couple years, but who still face extremely high rates of unemployment in some parts of the country.
The table below shows unemployment rates by race and ethnicity for each of the 12 metro areas with a Federal Reserve Bank, as well as other large metro areas across the country with sizable black or Latino populations. We only present unemployment rates for metro areas where the sample size was large enough to generate a reliable estimate for a particular race or ethnic group. These data show that nationally, the black unemployment rate has declined 3.1 percentage points over the last two years, compared with a 2 percentage points decline for Hispanics and a 1.2 percentage point improvement for whites. Although double-digit rates of black unemployment were more of a norm just two years ago than now, African Americans are still suffering from staggering unemployment, with rates higher than 10 percent in Chicago, Detroit, and Philadelphia. With the exception of Dallas, Latinos are more likely to be unemployed than whites in each of the selected metro areas, but Hispanic unemployment rates remain most elevated in Philadelphia and Chicago.
Raising rates, even a little, will slow the economy and slow progress in reducing unemployment
This week the Federal Open Market Committee (FOMC) will meet to decide whether or not to raise interest rates. By now this is a familiar debate. Some (call them hawks) argue that rate hikes are needed to slow the pace of economic growth and slow progress in reducing unemployment in the name of combating potential inflation. Others (call them doves) argue that we should not tighten until we’re absolutely sure that genuine full employment has been locked in. The past years’ evidence argues strongly that the doves are right.
Let’s start with the Fed’s own projections, which some Fed officials recently pointed to during a meeting with the Fed Up coalition to claim that interest rate increases were not meant to slow the economy or raise unemployment.
The table below shows the Fed’s current projections for the unemployment rate and other variables. They forecast that it will move from today’s 4.9 percent to 4.7 percent in the last three months of this year, and then fall further, to 4.6 percent for 2017 and 2018. After this it rises (after some unspecified time) to its long-run equilibrium of 4.8 percent. This 4.8 percent long-run rate is essentially the Fed’s estimate of the “natural rate of unemployment”—the lowest rate the economy can stay at without sparking an acceleration of inflation (this acceleration terminology is key: it’s not just inflation rising from 1.5 percent to 2.5 percent, it’s inflation that rises from 1.5 percent to 2.5 percent to 3.5 percent to 4.5 percent and so on). Importantly, in the Fed’s forecast, the unemployment rate falls over the next three years even as the projected federal funds rate is moved steadily up. By 2018, the 4.6 percent unemployment coincides with a 2.4 percent federal funds rate (it is just 0.25 percent today).
Nationwide increases in income are visible at the state level
Earlier this week the Census Bureau released data from the Current Population Survey (CPS) showing strong national income growth in 2015. State income data from the American Community Survey (ACS), which the Census Bureau released today, show similar results across the United States, with a 3.8 percent increase in real (inflation-adjusted) median household income for the country as a whole. This translates to an increase of $2,062 in the annual income of the typical U.S. household. (The ACS has a different sample and covers a somewhat different timeframe than the CPS, leading to slightly different estimates between the two surveys.) Real median household income increased in 39 states and the District of Columbia between 2014 and 2015.
Between 2014 and 2015, the largest percentage gains in household income occurred in Montana, where the typical household income grew by $3,146—an increase of 6.7 percent. Tennessee (6.4 percent), Oregon (5.9 percent), Massachusetts (5.7 percent), Rhode Island (5.7 percent), Wisconsin (5.6 percent), Hawaii (5.5 percent), New Hampshire (5.5 percent), District of Columbia (5.4 percent), Wyoming (5.4 percent), Kentucky (5.1 percent), and Vermont (5.1 percent) all had increase of 5 percent or more. In 11 states, median household income was unchanged over the year. There were no states that had a statistically significant decrease in median household income.
After years of wage stagnation, incomes have finally started to recover. The labor market recovery in 2015 included lower unemployment, more hours of work, and strong inflation-adjusted wage growth.
Poverty rates decrease throughout the states in 2015
The poverty rate fell in many states between 2014 and 2015, according to this morning’s release of state poverty statistics from the American Community Survey (ACS). In 23 states, there were decreases in the poverty rate, with 6 states reaching their 2000 levels. 27 states and the District of Columbia saw no significant change in the poverty rate, and there were no states that had a statistically significant increase in their poverty rate.
In 2015, the national poverty rate, as measured by the ACS , fell 0.8 percentage points, to 14.7 percent. (The ACS has a different sample, and thus slightly different estimates, than the Current Population Survey, which provided Tuesday’s national data.) Vermont saw the largest decline in its poverty rate (1.9 percentage points), followed by Tennessee (1.6 percentage point) and South Carolina (1.3 percentage point). The lowest poverty rates were in New Hampshire (8.2 percent) and Maryland (9.7 percent). While poverty did not rise in any state in 2015, there were still two states with poverty rates above 20 percent: New Mexico (20.4 percent) and Mississippi (22.0 percent).
Widespread income growth at the national level, driven by improvements in labor market conditions, was key to the reduction of poverty across the states. At the same time, minimum wage increases in many states and cities boosted wages for many of the country’s lowest-paid workers. These factors, combined with the absence of any real inflation, provided a welcome reversal to the stagnation in wages and incomes that has prevented improvements in living standards since the late 1990s. Additionally, government programs, including Social Security, housing subsidies, and unemployment insurance, kept millions above the poverty line. While poverty remains far too high in virtually every state, today’s data suggest that many states are heading in the right direction.
New Census data show strong 2015 earnings growth across the board, with black and Hispanic workers seeing the fastest growth
Today’s Census Bureau report on income, poverty, and health insurance coverage in 2015 shows that median household incomes for all race and ethnic groups increased between 2014 and 2015. Encouragingly, groups that, by and large, had seen the worst losses in the years since the Great Recession saw the biggest earnings gains in 2015. Real incomes increased 6.1 percent (from $42,540 to $45,148) among Hispanics, 4.4 percent (from $60,325 to $62,950) among non-Hispanic whites, 4.1 percent (from $35,439 to $36,898) among African Americans and 3.7 percent (from $74,382 to $77,166) among Asians. While the increase in incomes was statistically significant for all groups except Asians, racial income gaps remained unchanged between 2014 and 2015. The median black household earned just 59 cents for every dollar of income the white median household earned, while the median Hispanic household earned just 71 cents. Meanwhile, households headed by persons who are foreign born saw an increase in incomes of 5.3 percent between 2014 and 2015 (from $49,649 to $52,295), compared to an increase of 4.4 percent (from $54,741 to $57,173) among households with a native-born household head.
Based on EPI’s imputed historical income values (see the note under Figure A for an explanation), real median household incomes for all groups, except Hispanics, remain well below their 2007 levels. Between 2007 and 2015, median household incomes declined by 6.8 percent (-$2,686) for African Americans, 3.2 percent (-$4,662) for whites and 5.4 percent (-$7,158) for Asians, but increased 5.4 percent ($2,310) for Hispanics. Asian households continue to have the highest median income, despite large income losses in the wake of the recession.
The primary driving force behind the slow return to pre-recession income levels has been stagnant wage growth. Real wages had been essentially flat since 2000, but wage growth received an added boost in 2015, as a result of low inflation. From the start of the recovery in 2009 through 2015, real earnings of men working full-time, full-year are up for all race and ethnic groups—white men (1.5 percent), Hispanic men (7.0 percent), and black men (3.4 percent). As a result, the black-white male earnings gap is unchanged, but the Hispanic-white male earnings gap narrowed. Black men earned 70 cents for every dollar earned by white men in 2015 (compared to 69 cents/dollar in 2009) and Hispanic men earned 63 cents on the dollar (compared to 60 cents/dollar in 2009).
Poverty declined in 2015 by all measures; government programs, once again, kept millions above the poverty line
The official poverty rate fell by 1.3 percentage points from 2014 to 2015, as annual earnings and household incomes rose significantly for the first time since 2007. Since 2010, the U.S. Census Bureau has also released an alternative to its official poverty measure known as the Supplemental Poverty Measure (SPM). As shown in Figure A, the SPM has consistently indicated that poverty in America is more extensive than the official poverty measure reports. The good news is that the SPM data do show a similar decline in poverty last year to that reported in the official poverty measure. This year’s SPM release reported that in 2015, 45.7 million people were in poverty—roughly 14.3 percent of Americans. Under the “official” poverty measure, 43.1 million people were in poverty, or 13.5 percent of all Americans.
Poverty rates, official and supplemental poverty measure (SPM), all people and children, 2009–2015
| SPM – all people | Official poverty – all people | SPM – children | Official poverty – children | |
|---|---|---|---|---|
| 2009 | 15.3% | 14.3% | 17.3% | 20.7% |
| 2010 | 16.0% | 15.1% | 18.0% | 22.0% |
| 2011 | 16.1% | 15.0% | 18.0% | 21.9% |
| 2012 | 16.0% | 15.0% | 18.0% | 21.8% |
| 2013 | 15.8% | 14.8% | 18.1% | 21.5% |
| 2014 | 15.3% | 14.8% | 16.7% | 21.1% |
| 2015 | 14.3% | 13.5% | 16.1% | 19.7% |
Note: 2013 values reflect the CPS ASEC redesigned income questions.
Source: EPI analysis of Current Population Survey Annual Social and Economic Supplement Historical Income Tables.
The SPM data also show a lower rate of child poverty than the official statistics, primarily as a result of the SPM’s inclusion of noncash income from government assistance in its calculations. In 2015, the official child poverty rate was 19.7 percent—a decline of 1.4 percentage points from 2014. Under the SPM, the child poverty rate was 16.1 percent, 0.6 percentage points lower than in 2014 although the Census Bureau reports that this reduction in the SPM child poverty rate was not statistically significant.
Income gains in 2015 don’t reverse long-run trend toward greater inequality
In recent decades, the vast majority of Americans have experienced disappointing growth in their living standards—despite economic growth that could have easily generated faster gains in their living standards had it been broadly shared. Today’s excellent news on family income growth over the past year doesn’t make up for this long legacy of rising inequality. It is certainly a good start. But, we’ll need a run of years like this to restore the income losses suffered during the Great Recession for most American families, let alone make up for a generation of income growth that lagged far behind the economy’s potential.
As with most economic analysis, assessing the growth of living standards for the vast majority requires specifying benchmarks against which to measure actual performance. I offer up two reasonable benchmarks. The first is how income growth differs for families at different parts of the income distribution. What we have seen since the last business cycle peak in 2007, before the Great Recession hit, is growing income inequality. Today’s news about income growth in 2015 is a welcome break from this trend, but does not yet overturn the general pattern that we have seen since 2007. The second benchmark I posit is income growth relative to that of earlier historical epochs. What this benchmark shows is that in the three decades following World War II, income growth was both much faster as well as more broadly shared than it has been since 1979.
By the Numbers: Income and Poverty, 2015
Key numbers from today’s new Census reports, Income and Poverty in the United States: 2015. All dollar values are adjusted for inflation (2015 dollars).
Earnings
Median earnings for men working full time rose 1.5 percent, to $51,212, in 2015. Men’s earnings are down 0.7 percent since 2007, and are still 0.1 percent lower than they were in 2000.
Median earnings for women working full time rose 2.7 percent, to $40,742, in 2015. Women’s earnings are up 1.5 percent since 2007, and are 7.8 percent higher than they were in 2000.
Median earnings for men working full time
- 2015: $51,212
- 2014–2015: 1.5%
- 2007–2015: -0.7%
- 2000–2015: -0.1%
Median earnings for women working full time
- 2015: $40,742
- 2014–2015: 2.7%
- 2007–2015: 1.5%
- 2000–2015: 7.8%
Superb income growth in 2015 nearly single-handedly restored incomes lost in the Great Recession
Today’s report from the Census Bureau shows impressive (and long-awaited) across-the-board improvements to household incomes over 2014–2015, as inflation-adjusted wages improved and unemployment fell (from 6.2 to 5.3 percent) while inflation was absent. Inflation-adjusted wages for women finally exceeded their pre-recession levels in 2015, rising 2.7 percent, while the 1.5 percent increase in men’s earnings leaves them just 0.7 percent down from 2007 levels. These findings reinforce the centrality of wage growth for reestablishing household income gains—as we argued in Raising America’s Pay—and the importance of lowering unemployment. This is for the simple reason that most households, including those with low incomes, rely on labor earnings for the vast majority of their income.
Despite gains in 2015, household incomes have still not fully recovered from the deep losses suffered in the Great Recession—the bottom 95 percent of households still had incomes in 2015 below those of 2007 (while those in the top five percent are now three percent ahead). One more year of modest growth will bring the broad middle class back to pre-recession incomes.
Non-elderly household incomes rebound
The Census data show that from 2014–2015, median household incomes for non-elderly households (those with a head of household younger than 65 years old) increased 4.6 percent, from $60,531 to $63,344. This increase is a superb and most-welcomed improvement. Median household income for non-elderly households in 2015 ($63,344) was 5.0 percent, or $3,304, below its level in 2007—roughly half the total loss that prevailed over the 2007–14 period. The disappointing trends of the Great Recession and its aftermath come on the heels of the weak labor market from 2000–2007, during which the median income of non-elderly households fell significantly, from $69,016 to $66,648, the first time in the post-war period that incomes failed to grow over a business cycle. Altogether, from 2000–2015, the median income for non-elderly households fell from $69,016 to $63,344, a decline of $5,672, or 8.2 percent.