Magic Corporate Tax Cuts and Other Fables

AP Photo/ Evan Vucci, File

Council of Economic Advisors Chair Kevin Hassett

One of the biggest obstacles standing between Donald Trump and his plan to drastically cut corporate taxes is the opinion of the American public. Corporate tax cuts, though a key part of the administration’s proposed tax reform package, also happen to be a particularly controversial one. And with recent surveys showing that a majority of Americans remains skeptical of lowering taxes on corporations, hawking big corporate tax cuts to the public presents the GOP with a challenge.

The White House’s Council of Economic Advisors stepped up to the plate on Monday, releasing a report that claimed that cutting the corporate tax from 35 to 20 percent could give American workers a pay raise as high as $9,000, once the economy has fully adapted to the change.

Corporate tax cuts mean higher after-tax profits. In theory, these profits could be used to fund new investments, which would presumably yield an increase in worker productivity, ultimately resulting in a wage boost. In practice, that’s been far from the case. Corporate after-tax profits have been at historic highs for the past 15 years, while worker compensation has seen minimal, if any, increases. Today’s CEOs are answerable to major shareholders to the exclusion of all other stakeholders, and least of all to their employees (93.6 percent of whom, in the private sector, don't even have a union through which they might have a smidgen of leverage).

Any argument that corporate tax cuts by themselves are a viable tool for helping workers must acknowledge that they primarily help shareholders; the ongoing debate concerns how much workers would benefit from such tax cuts paired with other policies or under the right circumstances. The nonpartisan Tax Policy Center, the Congressional Budget Office, the Joint Committee on Taxation, and even the U.S. Department of Treasury agree that lion’s share of corporate tax burden is carried by shareholders and therefore they would reap overwhelming rewards from a tax cut.

Kevin Hassett, who heads Trump’s Council of Economic Advisers, dismissed the Tax Policy Center’s analysis of Trump’s tax plan as “scientifically indefensible” and “fiction.” The comment came just weeks after the Treasury Department took down from it website a 2012 paper that found that shareholders would benefit most from a corporate tax cut. A Treasury spokeswoman told The Wall Street Journal that the paper "does not represent our current thinking and analysis."

But even economists who support the idea of corporate tax cuts say that the White House’s math doesn’t add up. Mihir Desai, a professor at Harvard Business and Harvard Law School and a co-author of a key study cited in the council report, has claimed that the report misinterpreted his study, according to The New York Times. Desai, who says he is a “believer in corporate tax cuts,” thinks the actual pay raise would be closer to $800. James Hines Jr., economics professor at the University of Michigan and coauthor of the study, also spoke out recently, saying that the income boost projected in the report was pushing the limits of the data.

Yet the council’s chief of staff, D.J. Nordquist, has maintained that the report did not misinterpret the study.

Kimberly Clausing, an economist at Reed College also referenced in the report, believes that the council has goes beyond the pale with its conclusions. “To the extent that they’re telling public this, the council is engaged in a deliberate falsehood,” says Clausing. “It’s bizarre and misleading to say this is about the workers, and not giving big tax cuts to shareholders.”

Another feature of Trump’s corporate tax revamp is a bid to repatriate the almost $2.6 trillion in untaxed corporate profits currently being held overseas. By declaring a “tax holiday” and offering a sweetheart rate as low as 10 percent, the administration and Republicans in Congress hope to lure offshore money back into the country. This, they claim, would boost job and wage growth. A novel idea to be sure—that is, if it weren’t for the fact that the Bush administration enacted this very policy in 2004, to woeful results. In 2005 and 2006, previously untaxed corporate income was allowed to be repatriated at a rate of 5.25 percent.

The result? About $312 billion was brought back into the country. Economists estimate that as much as 92 cents of returned every dollar was funnelled into shareholder dividends or used to purchase stock buybacks. The promised job and wage growth never came. 

And yet, the data be damned: President Trump, Treasury Secretary Steve Mnuchin, and House Speaker Paul Ryan have all gone to great lengths to make clear that this tax reform package is meant to be a shot in the arm of the middle class and is unequivocally not a giveaway to the wealthy. If their goal truly was to provide significant relief to the middle class, however, it would not be done through corporate tax cuts ... or by having tax holidays, killing the estate tax, and lowering taxes on pass through entities, for that matter. From what we’ve seen so far, Trump’s tax plan provides a huge win for the wealthy, but only bluster and breadcrumbs for everyone else.

The day after the council report was released, President Trump traveled across town to the Heritage Foundation to sell his tax plan. He invoked memories of Ronald Reagan’s partnership with the conservative think tank to cut taxes in the ‘80s, and promised a “middles-class miracle” if his tax cuts were passed. He had no trouble winning over the crowd of rightwing ideologues. Winning over the American public, however, should prove more difficult.

Tax Cuts for the rich. Deregulation for the powerful. Wage suppression for everyone else. These are the tenets of trickle-down economics, the conservatives’ age-old strategy for advantaging the interests of the rich and powerful over those of the middle class and poor. The articles in Trickle-Downers are devoted, first, to exposing and refuting these lies, but equally, to reminding Americans that these claims aren’t made because they are true. Rather, they are made because they are the most effective way elites have found to bully, confuse and intimidate middle- and working-class voters. Trickle-down claims are not real economics. They are negotiating strategies. Here at the Prospect, we hope to help you win that negotiation.

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