EFFECTS OF THE 2017 CORPORATE TAX CUTS

There are new data on the effects of the federal tax cuts enacted in December 2017 by the Tax Cuts and Jobs Act (TCJA). They are not what their Republican proponents promised. They promised that corporations would use their big tax cuts to create new jobs, hire new workers, and improve workers’ pay and benefits. And they promised the tax cuts would pay for themselves and not increase the federal debt. (See this previous post for some background information.)

The tax cuts did dramatically increase profits for corporations. Corporate profits for the biggest 500 corporations (the S&P 500) grew by almost 21% in 2018. At the six biggest U.S. banks, profits grew almost 30% to a record $120 billion. [1] AT&T projects profits will be up $3 billion in 2018 and Amazon doubled its profits to $11.2 billion.

So, what did corporations do with their record profits?

Corporations have rewarded shareholders, first and foremost. In 2018, they spent $1 trillion buying up their own shares of stock and paid out $500 billion in dividends to shareholders. Both figures are records. Because of foreign ownership of stock in US corporations and of corporations or subsidiaries in the US, a third of the money spent on stock buybacks and dividends goes to foreign nationals. Because this money doesn’t get spent in the US economy, the tax cuts probably made America poorer, not richer. [2] US corporations also spent a record $400 billion on cash acquisitions of other companies, which doesn’t add to the economy or benefit workers. [3]

Stock buybacks boost a stock’s prices, rewarding shareholders (not workers) and corporate executives, whose pay is almost always tied to the price of the stock. Senators Sanders and Schumer have proposed a law that would ban stock buybacks for any corporation that pays workers less than $15 per hour. [4]

Stock buybacks were illegal until 1982, which is roughly (and probably not wholly coincidentally) the same time wages stopped rising for most Americans. Before then, a bigger share of corporate profits was used to increase workers’ wages, rewarding them for their increased productivity. [5]

Given that the great bulk of the corporate tax cuts have been passed through to stockholders via dividends and stock buybacks, and given that 84% of stocks are owned by the wealthiest 10% of the population, the other 90% of residents will see little if any benefit from the corporate tax cuts. Therefore, these corporate tax cuts contribute to growing income and wealth inequality.

The creation of new jobs and the growth in wages have been modest. There certainly hasn’t been the boom in the economy or wages that Trump and the Republicans claimed would happen. Moreover, the largest corporations, which benefited the most from the tax cuts, have NOT been creating jobs or boosting workers’ wages.

The 1,000 largest public corporations in the U.S. have CUT nearly 140,000 jobs since the passage of the tax cut law. For example, General Motors recently announced plans to close several plants and cut 15,000 jobs, despite receiving a roughly $500 million benefit from the tax cuts.

AT&T cut over 10,000 jobs in 2018 and is closing three U.S. call centers, despite an estimated $3 billion annual increase in profits due to the tax cut. Although AT&T’s CEO had promised to create jobs and bolster its workforce with the benefits of the tax cuts, AT&T has only paid a one-time, $1,000 bonus to its employees at a cost of $200 million, which is only 7% of one year’s increase in profits. Meanwhile, three-quarters of its overall 2018 profits were spent on dividends and stock buybacks that benefit shareholders, including executives, and not its workforce. [6]

For the Wall Street financial corporations, profits for the first half of 2018 were up 11% at $13.7 billion, after rising 42% in 2017. The average salary in these firms jumped 13% to $422,500. Jobs in the financial industry account for less then 5% of private sector jobs in New York City, but 21% of private sector wages. [7] Wages for these highly-paid workers are rising, but not for most workers.

Due to the tax cut, federal tax revenue on corporate income plunged $130 billion (45%) from 2017 to 2018, from $290 billion to $160 billion. [8] Furthermore, Amazon, for example, paid no federal income taxes for the second year in a row despite having profits of $17 billion over those two years. [9]

The federal deficit is increasing and is estimated to be $830 billion for 2018 and to climb to $1,000 billion next year (i.e., $1 trillion) and remain at that level for subsequent years. The annual deficit had been declining under President Obama both in terms of dollars ($585 billion in 2016) and as a portion of the overall economy (i.e., 3.1% percent of Gross Domestic Product [GDP]). Under President Trump, it has jumped in dollars ($830 billion) and to 4.0% percent of GDP. [10] So, clearly the tax cuts are not paying for themselves.

Moreover, the increase in the federal deficit and the cost of interest on the growing federal debt will result in future cuts to government programs or increases in other taxes. These cuts or increases are much more likely to fall on the less wealthy 90% of the population.

Therefore, it’s a near certainty that the great majority of Americans will be worse off due to the Trump and Republican corporate tax cuts of 2017.

[1] Levitt, H., & Abelson, M., 1/16/19, “It’s official: Wall Street topped $100 billion in profit,” The Wall Street Journal

[2] Krugman, P., 1/1/19, “The Trump tax cut: Even worse than you’ve heard,” The New York Times

[3] Wursthorn, M., 12/16/18, “The rocky stock market stills pays dividends to investors,” The Wall Street Journal

[4] Inequality Weekly newsletter, 2/18/19, Inequality.org (https://inequality.org/resources/inequality-weekly/)

[5] Reich, R., 3/21/18, “The buyback boondoggle is beggaring America,” The American Prospect (http://prospect.org/article/buyback-boondoggle-beggaring-america)

[6] Johnson, J., 1/7/19, “After promising more jobs from Trump tax cut, report shows AT&T has ‘done just the opposite’ by slashing over 10,000 jobs in 2018,” Common Dreams (https://www.commondreams.org/news/2019/01/07/after-promising-more-jobs-trump-tax-cuts-report-shows-att-has-done-just-opposite)

[7] Talking Points, 9/18/18, “Wall Street salaries at highest level since 2008,” The Boston Globe

[8] Krugman, P., 1/1/19, see above

[9] Inequality Weekly newsletter, 2/18/19, see above

[10] Amadeo, K., 2/12/19, “US budget deficit by year, compared to GDP, debt increase, and events,” The Balance (https://www.thebalance.com/us-deficit-by-year-3306306)

THE DEPARTMENT OF DEFENSE’S MASSIVE FINANCIAL FRAUD

The Department of Defense (DOD) has been engaging in massive financial fraud for years. It has inflated its expenditures and budget requests repeatedly while stashing hundreds of billions of dollars into hidden slush funds.

In 1990, Congress passed and President George H. W. Bush signed into law the Chief Financial Officers Act. It requires 24 federal agencies to submit to annual audits – something every publicly-owned, private, for-profit corporation and every not-for-profit organization are required to do.

Only one of the 24 agencies has failed to comply with the requirement for an annual audit: the Department of Defense. It has only had one audit conducted and it failed the audit miserably. The private firms that were hired to perform the audit concluded that DOD’s financial records were so deficient and full of errors and irregularities that a reliable audit was impossible to perform.

The unsuccessful audit identified at least $21 TRILLION in financial transactions at DOD since 1999 that can’t be traced, documented, or explained. The DOD has the largest discretionary budget in the federal government, $716 billion in 2019, representing 54% of all appropriations. So, the financial problems uncovered and its failure to perform annual audits are extremely significant.

The attempted audit documented that the DOD’s leaders and accountants have been falsifying accounting records for decades. This has been done to deliberately mislead Congress (and the public) and to justify ever increasing budgets, regardless of actual need. The DOD was found to be literally making up numbers and financial transactions in its reports to Congress. [1] It’s important to note that higher DOD budgets mean more money for military contractors, including Boeing, Lockheed Martin, Raytheon, BAE Systems, Northrop Grumman, and General Dynamics.

One of DOD’s strategies was that rather than returning the money to the Treasury, as is required by law, when it didn’t spend all the money in its annual budget, it would create phony transactions to shift the money to a slush fund where it could hide the money and keep it.

Another DOD strategy was to create phony figures to cover up accounting errors and mismanagement. These made it look like its financial reports were accurate and that spending was in alignment with appropriations in the budget. These figures are referred to as “plugs” because they plug holes in DOD’s financial reporting. For example, in the 2015 Army’s budget alone, $6.5 trillion of plugs were found; a truly astonishing figure given the Army’s budget for the year was $122 billion.

DOD also frequently shifts money from the purposes officially authorized in its budget to other uses. Sometimes money is shifted multiple times making the ultimate use of the funds virtually untraceable.

Part of the reason for the 1990 Chief Financial Officers Act and its requirement for annual audits was that whistle-blowers in the 1980s had exposed wildly inflated DOD spending. Cost over-runs on weapons, enormous amounts of waste (such as $1,200 mugs [2]), financial mismanagement, and out-right fraud were evident at DOD then as they are today. The 1980s whistle-blowers estimated that DOD had accumulated roughly $50 billion in a slush fund by not returning unspent funds to the Treasury. However, this story line goes back at least to 1968 when another whistle-blower, A. Ernest Fitzgerald, testified before Congress and Senator Proxmire about cost overruns at DOD. He was demoted and his position eliminated as a result. In 1973, he was reinstated by order of the Civil Service Commission, but DOD marginalized him. In 1981, he was a founder of the organization that became the Project on Government Oversight (POGO), a private government watchdog that helps other whistle-blowers share information without having to be publicly identified. [3]

On September 10, 2001, Donald Rumsfeld, President G.W. Bush’s Secretary of Defense, held a press conference and made the startling announcement that “According to some estimates we cannot track $2.3 trillion in [DOD] transactions.” [4] This amount was over seven times the total DOD budget of $313 billion for 2001. No other Secretary of Defense, before or after Rumsfeld, has been anywhere near this forthright about DOD’s accounting shenanigans. Unfortunately, the attention this revelation was due got completely overshadowed and lost due to the terrorist attack the next day on the World Trade Centers in New York.

The Office of the Inspector General (OIG) within DOD has criticized DOD’s accounting practices for years but has never advocated for punitive action against DOD accountants or anyone else. After the recent increased attention to the problems highlighted by the unsuccessful audit, OIG began removing previous reports from its website. In addition, while OIG audit reports have always been made available on-line and in full, a recent report on the Navy’s 2017 financial statement was heavily redacted when it was made publicly available. Despite requests from the media and Congress for an unredacted version of the report, OIG has refused to release one. A Freedom of Information Act (FOIA) request by The Nation magazine for the unredacted version is currently pending. [5]

The scale and consistency of DOD’s financial manipulation and misreporting make it clear that this has been an intentional strategy to mislead Congress and pad its budget year after year after year. If this happened in the private sector (think Enron) people would be fired and prosecuted; and companies would go out of business.

If we want to make government more efficient and to save money by reducing waste and fraud, there’s more money and efficiency to be found at DOD than all other federal agencies combined. We need members of Congress now and a future President to demand that DOD clean-up its finances. They will need to counter the huge and powerful bureaucracy that is the DOD and the power of the military contractors (and their campaign contributions and lobbyists). They will have to overcome the sacrosanct nature of DOD spending and the political dogma that anyone who criticizes DOD spending is weak on defense and unpatriotic. Of course, nothing could be further from the truth. Having an efficient, effective, well-managed DOD is what being strong on defense is really all about.

[1] Lindorff, D., 11/27/18, “Exclusive: The Pentagon’s massive accounting fraud exposed,” The Nation (https://www.thenation.com/article/pentagon-audit-budget-fraud/)

[2] Gelardi, C., Week of 12/3/18, “A mugs’ game,” The Nation

[3] Sandomir, R., 2/14/19 “A. Ernest Fitzgerald, exposer of waste at the Pentagon, dies at 92” The New York Times

[4] As reported in Lindorff, D., 11/27/18, see above

[5] Lindorff, D., 11/27/18, see above

ARE THE DEMOCRATS’ IDEAS RADICAL?

The mainstream media’s frequent characterization of ideas put forth by Democratic members of Congress and Democratic presidential candidates as “radical” or “far left” or “out of the mainstream” is simply inaccurate. Most of the ideas so labeled are policies that:

Have previously been in place in the U.S.,
Are broadly supported by the American public,
Have been seriously considered in the U.S. in the past, and/or
Are widely in place in other wealthy countries.

For example, Representative Ocasio-Cortez’s recent suggestion that the income tax rate on income over $10 million be raised to 70% was called “insane.” In addition, it was stated that it would kill our economy.

However, in the 1950s, the top income tax rate was over 90% and our economy did just fine. The top tax rate was 70% on income over $216,000 up until 1980 and the economy continued to do well. In the 1980s, President Reagan slashed the top tax rate. The economy didn’t boom as a result, rather the growth and prosperity of the middle class stalled, workers’ wages became stagnant, and income and wealth inequality in the country began to explode. [1]

The 1950s, 60s, and 70s were a 30-year period with top income tax rates of 70% or more, on incomes of roughly $200,000 and up. This period also had strong economic growth, a growing middle class, and increasing equality. Therefore, a proposal to restore such a rate on incomes over $10 million represents a partial return to a policy with a proven track record of success. It is not “radical” or “insane” to say the least.

Ocasio-Cortez’s idea, therefore, is a sensible proposal to address growing inequality and an economy that is working for the rich (and especially the super-rich), but for no one else. What is out of the mainstream is President Trump’s and Congressional Republicans’ 2018 tax cut for the wealthy, given that 43% of voters say they want taxes raised on incomes over $250,000 (not just $10 million) and 60% say they don’t feel millionaires are paying their fair share of taxes. Furthermore, since 2003, the Gallup Poll has annually asked the public whether taxes on the rich were too high, just right, or too low. Every year, 60% to 70% of respondents have said “too low.” Yet, the mainstream media refer to supporters of the tax cut for millionaires as “moderates” and those who propose doing what a clear majority of Americans support as “radicals.” [2] [3]

Polls of the public also indicate that several other proposals reported as “radical” or “out of the mainstream” by the media are supported by majorities of Americans. Proposals for universal health insurance or Medicare for All are called radical, yet 70% of Americans support this, including a majority of Republicans. Proposals for tuition-free public college are called radical, but 79% of Democrats and 41% of Republicans support this.

In the 1950s and 1960s, tuition at public colleges and universities was free or minimal. Universal health insurance has been a topic of serious discussion in the U.S. on and off since President Franklin Roosevelt proposed it in 1944 as part of his Economic Bill of Rights, which included “the right to adequate medical care.” (See this previous post on FDR’s Economic Bill of Rights for more information.) Former Representative John Dingell, who just passed away at age 92, filed a bill, “The United States National Health Insurance Act,” in the U.S. House every session from 1955 to 2013; it would have created a single-payer health care system. [4]

Multiple polls have found that most Americans (including a majority or near-majority of Republicans) support Senator and presidential candidate Elizabeth Warren’s proposal for an annual wealth tax of 2% on wealth above $50 million, rising to 3% on assets over $1 billion. [5] Yet, the mainstream media and most pundits are calling her proposal radical.

We currently have a wealth tax; but it’s only on the main form of middle-class wealth – people’s homes. Homeowners pay a property tax, which is typically used to fund local government and schools. Nonetheless, the suggestion that other forms of wealth, ones that are typically owned by the very wealthy, be taxed at a similar rate is branded as radical.

Internationally, of course, the U.S. is the country that’s out of the mainstream. Most other wealthy nations have higher income tax rates than the U.S., have universal health insurance, and have free or near-free post-secondary education. A number of these countries also have a wealth tax – and more would have one if it were established as an international standard so the wealthy couldn’t so easily hide or shift their wealth to another country to escape a wealth tax. (But that’s a whole other topic for another post.)

Here in the U.S., these and many other policy proposals being put forth by Democrats are being labeled as radical, when they are actually anything but radical. They are supported by majorities of Americans (see this previous post for more information) and, in many cases, have been mainstream ideas for generations. Many of them have been pushed out for the mainstream by radical “conservatives” over the last 20 years, building on efforts that began over 40 years ago.

These ideas and policies – for higher income and wealth taxes, for universal health insurance, and for free public college – are being brought back into the mainstream by these Democratic politicians and their grassroots supporters. The election results of 2016 have brought them new levels of attention. Broad public support for the politicians proposing them, along with probable future election results, appear likely to put them squarely back in the mainstream. Resistance from the mainstream media and some politicians will have to be overcome, but it’s becoming clear who the real radicals are and who’s truly in the mainstream.

[1] Eagan, M., 1/11/19, “There’s nothing ‘extremist’ about social welfare,” The Boston Globe

[2] Eagan, M., 1/11/19, see above

[3] Meyerson, H., 1/24/19, “AOC’s achievement: Making American’s progressive beliefs politically acceptable,” The American Prospect Blog (https://prospect.org/blog/on-tap)

[4] Nichols, J. 2/8/19, “John Dingell kept the faith, from the New Deal to ‘Medicare for All’,” The Nation (https://www.thenation.com/article/john-dingell-obit-medicare-for-all/)

[5] Kapur, S., 2/9/19, “Warren starts 2020 bid, vows to end system ‘rigged’ by rich,” Bloomberg (https://www.bloomberg.com/news/articles/2019-02-09/pushing-a-wealth-tax-elizabeth-warren-to-launch-white-house-bid)

CONTROLLING DRUG PRICES

Clearly, we need better regulation of drug prices and the drug industry in the U.S. Unwarranted, steep increases in drugs’ prices and higher prices than in other countries are key indicators of the need for better regulation to lower prices. And, as recent investigations have uncovered, this applies to the generic drug makers as well as the brand name drug makers. It is estimated that if there were a truly free market for prescription drugs in the U.S., they would cost $80 billion instead of $430 billion, an annual savings of $350 billion. (See my previous post for more information.)

Three bills have been introduced in Congress to address the high and rapidly rising costs of prescription drugs in the U.S. They have been introduced in the Senate by Senator Sanders of Vermont and in the House by Representatives Khanna of California and Cummings of Maryland.

First, the Prescription Drug Price Relief Act would terminate patents, ending monopoly rights, for any drug whose price exceeded the median (middle) price among five comparable countries: Canada, the United Kingdom, France, Germany, and Japan. Drug prices in these countries are roughly half of what they are in the U.S., so our drug prices would come down substantially under this law. It is expected that drug companies would lower prices voluntarily if this law is passed; they wouldn’t want to lose their patent protections because, if they did, competition would likely drive prices even lower.

Second, the Medicare Drug Price Negotiation Act would allow Medicare to negotiate the prices it pays for drugs. Given that it spends roughly $100 billion a year on drugs, almost a quarter of all drug purchasing, it has substantial negotiating power. When the Medicare drug benefit was created, the Republicans in control of Congress and President George W. Bush did the pharmaceutical industry a huge favor by prohibiting Medicare from negotiating drug prices and also prohibiting the importation of drugs. The Veterans’ Administration and every private health insurance company, as well as every other country, save substantial amounts of money by negotiating drug prices with the drug manufacturers.

(In a classic case of the revolving door between government and industry, Representative Tauzin, chair of the committee that wrote the Medicare prescription drug law, resigned two months after the bill was signed into law to become the head of the pharmaceutical industry’s trade association at an estimated salary of $2 million. His pay would increase to $11.6 million five years later.)

Third, the Affordable and Safe Prescription Drug Importation Act would allow the importation of drugs from other countries with safety standards comparable to those in the U.S., such as Canada and Germany. This would be a step toward a truly free market, something our business community rhetorically supports, and would significantly reduce drug prices given that prices in these countries are roughly half of what they are in the U.S. The charge by opponents that this would let unsafe drugs into the country rings hollow because many of our drug companies themselves import the drugs they sell or ingredients for them – largely from China.

I urge you to contact your U.S. Representative and Senators to ask them to support these three bills. It is time to reduce the exorbitant profits of the drug makers by reducing the exorbitant prices of the drugs they sell. Furthermore, reducing their high profit margins would reduce the incentive to engage in fraudulent practices to promote additional sales of their drugs.

You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.