During the run-up to the passage of the “Republican Tax Cuts and Jobs Act” late last year, one technical paper from the Treasury Department’s Office of Tax Analysis suddenly went missing. Why “Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology” alone among the office’s four-decade online archive of reports and analyses disappeared in September 2017 was never a mystery. The May 2012 update to a 2008 Bush administration assessment concluded that 82 percent of the benefits of a corporate tax cut would go to capital and only 18 percent to labor. That forecast wasn’t just a damning indictment of the $1 trillion corporate tax cut from 35 to 21 percent at the heart of the GOP’s $1.5 trillion, 10-year plan. That predicted windfall for wealthy shareholders also made a mockery of the comical claims by Trump administration mouthpieces like Treasury Secretary Steven Mnuchin that workers would win big:
On Fox News, Mnuchin claimed that “most economists believe that over 70 percent of corporate taxes are paid for by the workers.” At an event in Kentucky, he declared that “over 80 percent of business taxes is borne by the worker.”
Mnuchin’s tall tale wasn’t just well outside the consensus of most economists and the nonpartisan Joint Committee on Taxation. Two months into the new tax regime, a survey by Morgan Stanley found that “only 13% of companies' tax cut savings will go to pay raises, bonuses and employee benefits” while “43% will go to investors in the form of stock buybacks and dividends.” American companies, already sitting on mountains of cash, have already spent over $170 billion on stock buybacks alone in 2018, the most ever this early in the year. As it turns out, Democrats warned that these gigantic gains for gilded-class shareholders would come to pass. And it’s hardly the first time. For decades, Democrats have been proven right about what tax code changes would or wouldn’t do for the rich and the economy over all.
Writing in the Washington Post this week, Paul Waldman pointed that the data so far confirm Democrats’ warning that the GOP corporate tax cut was “a scam.”
They charged that workers would see only a fraction of the benefits, and instead corporations would use most of their windfall for things like stock buybacks, which increase share prices and benefit the wealthy people who own the vast majority of stocks.
The Oracle of Omaha Warren Buffett acknowledged as much. His Berkshire Hathaway company made $65 billion over its last fiscal year, a staggering $29 billion from the GOP tax cut alone. Apple, which already plowed $30 billion into stock buybacks in 2017, is likely to pour another $30 billion into driving up shareholder value this year. And as the New York Times recently reported (“Trump’s Tax Cuts in Hand, Companies Spend More on Themselves Than on Wages”), they have plenty of company:
Almost 100 American corporations have trumpeted such plans in the past month. American companies have announced more than $178 billion in planned buybacks — the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm.
Such purchases reduce a company’s total number of outstanding shares, giving each remaining share a slightly bigger piece of the profit pie.
Cisco said this month that in response to the tax package, it would bring back to the United States $67 billion of overseas cash, using $25 billion to finance additional share repurchases. Alphabet, the parent company of Google, authorized up to $8.6 billion in stock purchases. PepsiCo announced a fresh $15 billion in planned buybacks. Chip gear maker Applied Materials disclosed plans for a $6 billion program to buy shares. Late last month, home improvement retailer Lowe’s unveiled plans for $5 billion in purchases.
It's no wonder Howard Silverblatt, a senior analyst for S&P Dow Jones Indices predicted, “I’m expecting buybacks to get to a record in 2018.” But if you took Team Trump’s word for it that workers will be getting a huge bump in pay and benefits thanks to the corporate tax rate reduction and incentives to repatriate overseas profits, you will be sorely disappointed. Wages hikes aren’t even in the top three areas into which America’s corporate titans will invest their haul:
In addition to benefiting investors, these maneuvers will end up boosting the pay of top executives because their compensation packages are often tied to the price of their companies’ stock. Finally, a small sliver of the money will find its way into paychecks of rank-and-file employees, but it won’t be a big boost and will probably come in the form of a temporary bonus, rather than a lasting raise.
Morgan Stanley analysts estimated that 43 percent of corporate tax savings would go to buybacks and dividends and nearly 19 percent would help pay for mergers and acquisitions. Just 17 percent would be used for capital investment, and even a smaller share, 13 percent, would go toward bonuses and raises.
Now, listening to Donald Trump, Treasury Secretary Mnuchin, House Speaker Paul Ryan (R-WI) or Senate Majority Leader Mitch McConnell (R-KY) last fall you would have had no idea that this scenario would come to pass. They boasted that households on average would see $4,000 more each year, a figure quickly rejected by fact-checkers and economists like Lawrence Summers and Brad Delong. But leave aside for the moment that American companies faced historically low interest rates, high corporate profits, and an actual tax rate (after deductions and loopholes) of 18.6 percent, a figure largely in line with U.S. economic competitors. Throughout 2017, corporate America was crystal clear about what they planned to do with their Trump tax cut winnings.
In November, Bloomberg reported that “major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they’ll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump’s promise that his plan will create jobs and boost wages for the middle class.” That doesn’t square with Trump’s November pledge in Missouri that “our focus is on helping the folks who work in the mailrooms and the machine shops of America.”
Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.
Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been “actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that.” Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D’Amelio and Cisco CFO Kelly Kramer have recently made similar statements.
“We’ll be able to get much more aggressive on the share buyback” after a tax cut, Kramer said in a Nov. 16 interview.
John Shin, a foreign exchange strategist at Bank of America Merrill Lynch, explained those unsurprising views:
“Companies are sitting on large amounts of cash. They’re not financially constrained. They’re still working for their shareholders, primarily."
Shin should know. Last summer, he surveyed more than 300 major corporations regarding their plans for a tax overhaul. He and his colleagues looked specifically at the impact on the CEO’s plans after a “tax holiday” that would allow them to bring back money held overseas at a low tax rate. (The current Senate proposal calls for a 10 percent rate for companies repatriating some or all of their shares of the estimated $2.8 trillion in offshore profits.) What did the B of A/Merrill Lynch study find?
The No. 1 response? Pay down debt. The second most popular response was stock buybacks, where companies purchase some of their own shares to drive up the price. The third was mergers. Actual investments in new factories and more research were low on the list of plans for how to spend extra money.
But you don’t have to take a corporate CEO’s word for it that they will put their tax cut payday into the pockets of shareholders instead of workers. Just look at what they did the last time they had the chance. As the New York Times recalled:
After intense lobbying by big companies, Congress in 2004 passed the American Jobs Creation Act, which provided a one-time tax break for companies that wanted to repatriate their offshore profits. Companies brought home $312 billion at a rate of just 5.25 percent. Although the break was intended to spur investment and hiring, a plethora of studies showed that companies responded by spending billions buying back their shares, lifting their stock prices, and didn’t expand their American work forces.
Pfizer, for example, brought home $37 billion at the reduced rates — and shed 10,000 workers. Hewlett-Packard repatriated more than $14 billion, while eliminating more than 14,000 jobs.
So much for Trump’s “America First” promise last year that his tax plan would overwhelmingly benefit “the plumbers, the carpenters, the cops, the teachers, the truck drivers, the pipe fitters, the people that like me best.” After all, as the Times inconveniently pointed out this week:
Mr. Trump might argue that it doesn’t much matter that the tax cuts will be a boon for investors because many Americans own stocks. The president has recently touted the rising value of 401(k) accounts as a benefit of the tax law. But roughly half of all families own no stock, and most people have holdings that are worth less than $5,000. Most stock holdings, a whopping 84 percent, are in the hands of people whose incomes put them in the top 10 percent of households.
This is why cutting corporate tax rates, like slashing capital gains tax rates, don’t drive more investment, but instead only increases the national debt and widens income inequality. And adding insult to injury, many of the biggest beneficiaries of the U.S. corporate tax rate are foreigners.
As Senator Chris Van Hollen (D-MD) summed it up, the Republican Tax Cuts and Jobs Act is “a direct transfer of wealth from the American middle class to foreign investors.” Newsweek put the value of that transfer at roughly $520 billion:
If the plan passes through the Senate this month, foreigners will see more money than all middle-income households in the United States combined. That’s because foreign investors now own more than $6.5 trillion worth of U.S. equity and investment fund shares, and about 35 percent of all U.S. corporate stock, according to data from the Tax Policy Center. The GOP plan will lower corporate tax rates to 20 percent, benefiting foreign investors at the cost of at least $52 billion each year, or $520 billion over the next decade.
Despite the passage of the budget-busting, payday for plutocrats that is the GOP’s Tax Cuts and Jobs Act, Democrats can take some comfort in being able to say “I told you” about the inevitable windfall for the wealthy they rightly predicted. But it’s hardly the first time those to the left of center demolished Republican talking points about the impact of tax code changes on the rich. Just five years ago, the GOP’s best and brightest warned that the small tax hikes on upper-income Americans contained in the 2013 “fiscal cliff” deal” would be “job-crushing” and ruin the economy. Then as now, they were wrong.
As you'll recall, then Senator Obama campaigned for the White House pledging to reverse the Bush tax cuts of 2001 and 2003 for households earning over $250,000 a year. But with the economy devastated by the steep recession which began in late 2007, any tax hikes had to wait. Instead, Obama delivered the largest two-year tax cut with the 2009 stimulus package, and enacted a two-year, two percent payroll tax reduction for 2011 and 2012. But as 2013 approached, the U.S. faced the so-called "fiscal cliff," a triple whammy for the economy in which the Bush tax cuts and the payroll tax cuts for all taxpayers would expire even as the sequestration process slashed federal spending. And as I noted in November 2012, the CBO warned those developments—or almost of all of those developments—would be incredibly damaging to the American economy:
In its report ("Economic Effects of Policies Contributing to Fiscal Tightening in 2013"), the CBO warned that the deficit-slashing effects of allowing the Bush tax cuts expire, ending the two-year payroll tax holiday and letting last year's budget sequestration deal proceed on January 1, 2013 could return the United States to recession. The combination of spending cuts and tax increases could reduce gross domestic product by 2.9 percent and drive the unemployment rate from 7.9 percent today to 9.1 percent by the end of next year.
But as Dylan Matthews explained in the Washington Post, letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that instant austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1% from economic growth next year. [Emphasis mine.]
Despite these assurances from CBO that raising income tax rates (from 36 to 39.6 percent) and capital gains and dividend tax rates (from 15 to 20 percent) would have no impact on the economy, congressional Republicans doubled-down on their "job creator" mythology. While Senator Minority Leader Mitch McConnell (R-KY) warned of "the Europeanization of the U.S. economy," House Speaker John Boehner declared, "Going over part of the fiscal cliff and raising taxes on job creators is no solution at all." Previously, Boehner peddled the GOP's job creators myth another way.
"The top one percent of wage earners in the United States … pay forty percent of the income taxes … The people [President Obama] is talking about taxing are the very people that we expect to reinvest in our economy."
As it turned out, Boehner and his conservative amen corner were completely wrong. Despite Republican cries of "job-killing" tax increases on "job creators," the U.S. economy continued to expand and add workers without interruption. Between 1995 and 2012 the effective tax rate for the 400 highest earners in the United States had plummeted from 27 to just 17 percent. But as Josh Barro, Jim Tankersley and Josh Zumbrun among others documented, thanks to the upper-income tax hikes passed as part of that "fiscal cliff" deal, the rate for those richest 400 Americans jumped to 23 percent in 2013. Nevertheless, the recovery’s GDP and job growth rolled on. And that is precisely what the Obama administration, Democrats on Capitol Hill and the nonpartisan Congressional Budget Office predicted.
The fiscal cliff deal did raise tax rates for individuals earning over $400,000 a year (and families) earning $450,000 starting in 2013. (Including the 3.8 percent Obamacare surcharge, the top capital gains rate moved to 23.8 percent.) But as the White House explained in its jobs report for November 2015, "Our businesses have now added 13.7 million jobs over 69 straight months, extending the longest streak on record." The unemployment rate, which would-have-been President Mitt Romney promised to bring down to 6 percent by the end of his first term, fell to 5.0 percent by the end of 2015.
And as this chart from the Center on Budget and Policy Priorities (CBPP) shows, U.S. economic growth proceeded apace:
Of course, this result is nothing new. In 1993, Republicans were united behind Newt Gingrich’s declaration that President Bill Clinton's upper income tax increases from 35 to 39.6 percent would "kill the current recovery and put us back in a recession."
If Barack Obama's experience with record-setting Republican obstructionism has been painful, Bill Clinton's was unprecedented at the time. When Clinton's 1993 economic program scraped by without capturing the support of even one GOP lawmaker, the New York Times remarked at the time:
Historians believe that no other important legislation, at least since World War II, has been enacted without at least one vote in either house from each major party.
Inheriting massive budget deficits and stubborn unemployment from Bush the Elder, Clinton's $496 billion program was nonetheless opposed by every single member of the GOP, as well as defectors from his own party. As the Times recounted, it took a tie-breaking vote from Vice President Al Gore to earn victory:
An identical version of the $496 billion deficit-cutting measure was approved Thursday night by the House, 218 to 216. The Senate was divided 50 to 50 before Mr. Gore voted. Since tie votes in the House mean defeat, the bill would have failed if even one representative or one senator who voted with the President had switched sides.
Throughout 1993, President Clinton faced venomous—if completely baseless—charges from his Republican opponents. Newt Gingrich warned the day before the budget vote, "This is the Democrat machine's recession, and each one of them will be held personally accountable." Bob Dole, Clinton's future re-election opponent, complained, "People out there in the real world just don't understand how record-setting tax increases and a taxpayer-financed spending spree by Congress will solve the deficit or put Americans back to work." Future-Gov. John Kasich (R-OH) told Clinton and the Democrats, "your economic program is a job killer" and predicted, "This plan will not work. If it was to work, then I'd have to become a Democrat." Meanwhile, future tea party sugar daddy Dick Armey read his tea leaves:
"Clearly this is a job killer in the short run. The revenues forecast for this budget will not materialize; the costs of this budget will be greater than what is forecast. The deficit will be worse, and it is not a good omen for the American economy."
In August 1993, Republicans deployed their biggest gun—Ronald Reagan—to direct fire at President Clinton. The Gipper, the same man who tripled the U.S. national debt in eight years, blasted away from the op-ed pages of the New York Times:
"The President's 'wonder plan' could be cited for deceptive advertising by the Food and Drug Administration. Job-killing taxes come right away, and hazy spending cuts are on the distant horizon. The five-year plan will likely impede economic growth and not come near its claim of $500 billion in deficit reduction."
Most dramatic of all was Texas Sen. Phil Gramm. The same man who led the 1990s crusade to gut regulation of Wall Street and the IRS and later called America a "nation of whiners," boldly—and wrongly—predicted:
"I believe hundreds of thousands of people are going to lose their jobs ... I believe Bill Clinton will be one of those people."
The Republican naysayers were, of course, utterly wrong on every count.
Bill Clinton kept his job and presided over a rapidly growing economy, expanding incomes, new stock market highs and a balanced budget. Clinton, who helped author one of the best eight-year economic performances of the modern presidents, bequeathed a CBO-estimated $5.6 trillion surplus to his successor, the man with the worst economic record. Alas, with his tax cut windfall for the wealthy, George W. Bush squandered the Clinton surpluses. For the record-high income inequality and historically low tax burden they helped produce, Bush and congressional Republicans yielded only a million new jobs—and red ink as far as the eye could see.
Nevertheless, almost two decades later Republicans resurrected the same failed talking points against President Obama during the fiscal cliff showdown. They denounced Obama's modest proposals as "job killing tax hikes" and "hurting small business" to "punishing job creators" and "class warfare." That's why Paul Krugman was right when he ended 2015 with this New Year's Eve message:
My point that the economy's pretty good job growth despite this tax hike -- raising taxes on job creators! -- refutes right-wing doctrine continues to stand.
But the litany of tried and untrue conservative sound bites on taxes is a long one. After all, tax cuts don’t pay for themselves. The estate tax does not threaten small businesses and family farms. Despite Mitch McConnell’s myth-making, it’s simply not true that “there's no evidence whatsoever that the Bush tax cuts actually diminished revenue” or that the Trump-GOP Tax Cuts and Jobs Act is “going to be a revenue producer.”
Oh, and one other thing. The benefits from Trump’s corporate tax cut overwhelmingly go not to workers, but to the wealthy. Just like Democrats—and that missing Treasury Department paper—said.