Tag Archives: tax cuts

Proving Nick Hanauer Right

I have previously cited Nick Hanauer, the billionaire who has repeatedly pointed out that the belief–embraced by the GOP–that raising the minimum wage depresses job creation is a fallacy.

As Hanauer has emphasized, this economic theory has cause and effect backwards: jobs are created by demand. (If you aren’t selling your widgets, you aren’t hiring more people to produce greater numbers of them.) Pay workers a living wage, putting disposable income in the hands of people who hadn’t previously had any, and increased demand will boost both job creation and the economy.

I get an email newsletter from Axios, (link unavailable) and a recent one included a report on fast-food industry earnings that certainly seems to confirm Hanauer’s thesis.

Between the lines: The fast-food industry’s biggest tailwind is coming from a surprising source — the increased pay of low-wage workers.

After trailing higher-paid workers for years since the financial crisis, earnings for the bottom 25% of workers have been growing at a rate much faster than the national average, and weekly earnings for the bottom 10% of full-time workers have grown even faster, data shows.

Generally, rising wages would be seen as a negative for the industry, but coupled with stable gas prices, the increasing paychecks of low-wage workers means more money spent at fast-food and fast-casual restaurants.

Be smart: Goldman’s research team estimates 70% of the industry’s sales growth over the past 5 years can be explained by rising wages, lower gas prices and a boost from third-party apps like GrubHub and Uber Eats.

Traditional economic theory says that if I have to pay employee A more, I will have less money available and I will thus be unable to hire B.  That makes all kinds of sense–all else being equal. What real life tells us, however, is that all else isn’t equal. As the Axios report shows, the increase in buying power more than compensates for the increase in payroll.

You would think that a political party devoted to the theory that cutting taxes will  generate revenue sufficient to pay for those cuts would understand this.

The theories may be similar, but reality can be a cruel mistress: when the issue is raising the minimum wage, real-world outcomes demonstrate that Hanauer’s approach works, but when the issue is tax rates, the Republican approach– cutting taxes on rich people– doesn’t.

As Paul Krugman has written,

In late 2007 the Trump administration pushed through a large tax cut, whose key component was a drastic reduction in the tax rate on corporate profits. Although most economists were skeptical about claims that this would do wonders for economic growth, conservatives were ebullient. Lower tax rates, they claimed, would give American corporations the incentive to bring back trillions of dollars invested overseas, and foreign corporations a reason to invest huge sums in the U.S.

And Republican politicians bought this argument. Even Susan Collins, the most moderate Republican in the Senate (although that isn’t saying much) declared herself convinced that the tax cuts would pay for themselves.

Krugman followed those opening paragraphs with graphs and statistics demonstrating rather dramatically that the tax cuts did not pay for themselves.  Not even close.

For example,Krugman says

Business investment was 13.2 percent of G.D.P. before the tax cut went into effect. It’s now … 13.5 percent. That’s a rise of around 0.3 percentage points, or less than a tenth of what the tax-cut advocates predicted.

As a result of the GOP’s 2017 tax cuts, deficits and the national debt have ballooned. Republicans would have marched on Washington with pitchforks if debt levels this steep had been generated by a Democratic Administration.

Real-world evidence says: pay working people a living wage, and everyone benefits.

Give the rich a tax cut, they sock their savings away in a tax haven, and no one else benefits.

Patriotic Millionaires

Prejudices against “those people” tend to be the familiar age-old biases based upon race, religion and the like, but other stereotypes abound and can be equally misleading. (In his teens, my middle son looked askance at  anyone in the “business class”– he felt they all valued profit over people.  When he grew up, he came to recognize the infinite variety of people who own businesses, and adjusted his expectations accordingly.)

Too many Americans these days characterize “the wealthy” as uniformly predatory capitalists with their boots on the necks of the working class–a description every bit as over- inclusive as my son’s earlier stereotype. Just as there are greedy and unattractive folks at the top of the income ladder, there are also good, caring people who are working for economic fairness.

Vox recently reported on a group of millionaires doing just that.

A group of millionaires dedicated to decreasing the influence of money in politics is planning to endorse candidates for the first time, in the 2018 midterm elections.

The only requirements: The candidates it backs have to be running against an incumbent who voted for the Republican tax cuts, and they’ve got to be able to talk about taxes in a way that doesn’t put voters to sleep.

Erica Payne, a progressive strategist, is the president of Patriotic Millionaires, the group making the endorsements.

Patriotic Millionaires is a group of about 200 wealthy Americans who advocate for less income inequality and against the concentration of wealth. It’s a bipartisan group, but it’s opposed to a central Republican idea: that benefits for the wealthy will eventually “trickle down” to the rest. That’s the thinking behind the 2017 tax cut bill, which reduced the corporate tax rate to 21 percent from 35 percent and disproportionately benefits businesses and the wealthy.

The group first came together in 2010 to oppose the extension of Bush-era tax cuts for millionaires. Since then, it’s expanded its focus beyond taxes to also include issues such as the minimum wage and campaign finance reform.

It has also expanded its membership to more than 200 people— to join, you have to have an annual income of more than $1 million or assets of more than $5 million. Morris Pearl, a former director at the investment firm BlackRock, chairs the group.

Patriotic Millionaires is a bipartisan organization concerned about the concentration of wealth; it advocates for less income inequality and rejects the argument–parroted by  “policy wonks” like Paul Ryan— that benefits for the wealthy will eventually “trickle down” to the rest of us. “Trickle down” of course, was  the purported justification for the 2017 tax cut bill, which reduced the corporate tax rate to 21 percent from 35 percent.

Despite claims that the measure would create jobs, it has disproportionately benefited businesses and the wealthy–while exploding the deficit.

According to estimates from the Center on Budget and Policy Priorities, the top fifth of earners get 70 percent of the bill’s benefits, and the top 1 percent get 34 percent. The new tax treatment for “pass-through” entities — companies organized as sole proprietorships, partnerships, LLCs, or S corporations — will mean an estimated $17 billion in tax savings for millionairesin 2018. American corporations are showering their shareholders with stock buybacks, thanks in part to their tax savings, and have returned nearly $700 billion to investors this year.

As noted above, the 2018 midterms will be the first time Patriotic Millionaires will endorse candidates.

Patriotic Millionaires is currently considering about 60 candidates for potential endorsement, most of whom are Democrats opposing incumbent Republican lawmakers in the House of Representatives in competitive districts. The candidates on the list tend to fall into the more moderate, establishment camp, but some, such as Katie Porter in California and Kara Eastman in Nebraska, are avowed progressives.

The group is bipartisan and would therefore theoretically be willing to back a Republican who voted against the tax billthere are 12 of them. I also asked if they were willing to back a democratic socialist candidate, to which Payne, the group’s president, replied that they will consider endorsing any candidate who is running against one of the lawmakers who voted to support the bill. “This tax bill is such a complete abomination that anybody who voted for it should be hurled from office,” she said.

Patriotic Millionaires joins other rich activists–Nick Hanauer and Tom Steyer come to mind–in arguing for economic sanity.

Think about these activists before you diss all rich people.

 

Those State “Laboratories”

Ah, federalism.

Life in the 21st Century challenges our federalist system in a number of ways; it gets more and more difficult to decide–at least at the margins–what sorts of rules should be applied to the country as a whole, and what left to the individual states.

However those issues get resolved, however, our federalist system pretty much guarantees that state governments will continue to be the “laboratories of democracy” celebrated by Justice Brandeis, who coined the phrase in the case of New State Ice Co. v. Liebmann.  Brandeis explained that a “state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Most recently, state governments have been “laboratories” for the GOP’s belief that low taxes are all that is needed to stimulate economic growth.

As David Leonhardt of the New York Times recently noted,

Until recently, Kansas offered the clearest cautionary tale about deep tax cuts. The state’s then-governor, Sam Brownback, promised that the tax cuts he signed in 2012 and 2013 would lead to an economic boom. They didn’t, and Kansas instead had to cut popular programs like education.

Now Kansas seems to have a rival for the title of the state that’s caused the most self-inflicted damage through tax cuts: Louisiana.

Those who follow economic news have been aware of the painful results of the  Kansas experiment for some time. Evidently, however, the news of its dire results and the subsequent, ignominious retreat by the Kansas legislature failed to reach Louisiana–and that state’s legislators appear unable to deal with the reality of their own failed experiment.

“No two ways about it: Louisiana is a failed state,” Robert Mann, a Louisiana State University professor and New Orleans Times-Picayune columnist, wrote recently.

A special session of the State Legislature, called specifically to deal with a budget crisis caused by a lack of tax revenue, failed to do so, and legislators adjourned on Monday. No one is sure what will happen next. If legislators can’t agree on tax increases, cuts to education and medical care will likely follow.

Leonhardt places the blame for this state of affairs on Bobby Jindal, who came to the Governor’s office having drunk deeply of his party’s ideological Kool-Aid:

Louisiana’s former governor, Bobby Jindal, deserves much of the blame. A Republican wunderkind when elected at age 36 in 2008, he cut income taxes and roughly doubled the size of corporate tax breaks. By the end of his two terms, businesses were able to use those breaks to avoid paying about 80 percent of the taxes they would have owed under the official corporate rate.

At first, Jindal spun a tale about how the tax cuts would lead to an economic boom — but they didn’t, just as they didn’t in Kansas. Instead, Louisiana’s state revenue plunged. The tax cuts helped the rich become richer and left the state’s middle class and poor residents with struggling schools, hospitals and other services.

Unfortunately, these “laboratories” aren’t working the way Justice Brandeis envisioned, because Republican representatives elected by the rest of the country refuse to learn from their failures. Ideology has once again trumped evidence– the tax bill passed by Congress and signed by Trump is patterned after those in Kansas and Louisiana.

The rich will get richer, and the poor and middle-class will pay the price. And those who refused to learn from the experiences of our “laboratories of democracy” will profess astonishment.

Corporations Will Use Their Windfalls To Create Jobs. NOT.

Part of the mantra obediently recited by advocates of the mis-named “tax reform” bill is their touching (or feigned) belief that corporations will use the funds being repatriated and/or saved from the tax collector to create jobs.

Brings to mind the old adage about the triumph of hope over experience.

Ed Brayton relays the recent, eye-opening response by corporate CEOs to a speech by Gary Cohn, Trump’s chief economic advisor.

Trump’s chief economic adviser, Gary Cohn, took part in an event hosted by the Wall Street Journal that featured an audience full of CEOs, and when a Journal editor asked for a show of hands by those leaders who would invest in new capacity if their taxes were cut, very few hands went up. Cohn seemed shocked.

Cohn really shouldn’t have been shocked. We’ve been here before, and there is no reason to believe that the fundamentals–or the economic incentives– have changed. As Brayton notes, corporate profits are already at record highs, and credit is very cheap and readily available.

If those businesses believed that investing in new factories or equipment that might create more jobs would result in higher profits for them, they would already be doing it. But they’re not. Indeed, while this poll was an informal one, formal surveys of CEOs find the same result.

This summer, Bank of America Merrill Lynch asked 300 companies what they would do if Congress passed a “tax holiday” that allowed them to bring back massive amounts of money being held overseas at a lower tax rate. 65% said they would pay down their debt. Second most popular option? Stock buyback. Neither of those things creates new jobs. Indeed, when George W. Bush did the same thing in 2004, about $300 billion in cash kept in overseas subsidiaries was brought back at a ridiculous 5.25% tax rate. 80% of it was used to buy back stock. Why? Because it makes the shares of CEOs, which are a huge part of their compensation package, much more valuable. So the rich people benefit but no one else does.

I don’t know whether the lawmakers who continue to push this theory have convinced themselves of its credibility through constant repetition, or whether they are knowingly putting the best possible spin on an economic policy that repeated experience tells us is bogus. It probably doesn’t matter whether they are venal or stupid (not that the two categories are mutually exclusive); the outcome is the same: the rich get richer, and their political donations reward the lawmakers who’ve carried their water. Economic inequality and popular resentments continue to grow, along with political cynicism and social distrust.

It’s a prescription for upheaval, for further splintering of our already strained social fabric–and plenty of wealthy people understand that social unrest shrinks, rather than grows, the economy. As the contours of the tax “reform” bill  have become known, more than 400 American millionaires and billionaires have signed a letter to Congress demanding that Republican lawmakers not cut their taxes.

These wealthy Americans argue that reducing taxes on the richest families at a time when the the nation’s debt is high and inequality is at the worst level since the 1920s would be a colossal mistake.

The letter calls on Congress to not to pass any tax bill that adds to the debt and that “further exacerbates inequality.” Instead of cutting taxes of the wealthy, the letter tells Congress to raises taxes on rich people like them.

If money talks, theirs is the money Congress should listen to.

 

This Is Why We Can’t Have Nice Things….

Economists like to talk about “opportunity costs”–if you do X, you’ve lost the opportunity to do Y. I’ve been thinking about what we could do with the taxes we don’t get on the funds rich people hide from the IRS in those tempting tax havens, as disclosed by the Paradise Papers.

A column in the New York Times explained

A treasure trove of documents given the name of the Paradise Papers was unveiled last week, giving us a clearer idea of how rich people and powerful companies keep their money from the prying eyes of the Internal Revenue Service.

It seems that–if you are rich enough to afford the right law firm and tax haven–you can navigate the Internal Revenue Code in such a way as to legally evade lots and lots of taxes. It turns out that sixty-three percent of foreign profits made by American multi-national corporations are squirreled away in those hideouts, out of the sight of those pesky IRS agents.

That disclosure was annoying enough, but what really pissed me off were a couple of estimates of what those evaded taxes might have paid for.

We worry a lot about the cost of social programs in this country, saying we simply can’t afford many things that we know could bring big rewards. But that missing $70 billion from corporate offshore tax avoidance would go a long way. A mere $140 million could replace the lead water pipes poisoning children in Flint, Mich. It would cost just an estimated $22.5 billion to end homelessness by providing all needy families with rental assistance. President Barack Obama asked Congress for $75 billion for his initial universal preschool plan; universal preschool for all 3- and 4-year-olds would cost $98.4 billion over 10 years.

Senator Bernie Sanders’s College for All Act doesn’t even require the federal government to cover the entire $70 billion cost of public college tuition, but it could if this money were available to the government. Divvying up $70 billion a year to each parent in the country would be a huge step toward ending childhood poverty. And the available pot of money, were offshore tax avoidance not an option, would be even larger if rich individuals were taxed at the rates we all face here at home.

According to The Hill, if those writing our tax laws didn’t prefer letting their donors off the hook for their fair share, we could afford pretty much anything. Here are just a few of the things The Hill says we could pay for if we weren’t rushing a $1.5-trillion debt-financed gift to billionaires through the legislative process:

What makes this effort to take from the poor to give to the rich especially galling is the hypocrisy of the GOP “deficit hawks.”

 After spending eight years railing against the evils of deficits, after blocking numerous important investments because we “couldn’t afford it” and after swearing time and again that debt was our No. 1 enemy, most Republican representatives have tossed their anti-deficit positions aside in the blink of an eye. That is galling, yes.

But perhaps even more galling is that, having thrown their fiscal caution to the wind and having decided that now, with a Republican in the White House, debt is no longer a concern, their best idea for spending hundreds of billions of dollars is to give it all to the rich. For that, they should be truly ashamed of themselves.

When you wonder why Americans can’t have universal health care, or great trains that run every 20 minutes on tracks that are smooth and well-maintained, or other public services and amenities that citizens of other developed countries enjoy, just remember: we give  money to our billionaires instead.