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)