How About that Tax “Cut”?

Update: tax reform has failed to raise wages, as promised. Tax and economic policy is a key contributor to personal finance. And it’s important for us to know what kind of policy we’re helping enact when we vote – for our economic future and for our country’s future.

I’m a bit of an enigma when it comes to tax policy opinion. I’m somewhat fiscally conservative in that I think the government should aim to balance its budget, but I’m also in favor of more progressive taxation to help meet that obligation. Irresponsible tax cuts that blow up deficits may win voter favor, but they will be passed on to present and future generations (including ours). That’s a real concern for me. As are effective tax rates that are lower for CEOs than their secretaries or janitors. We’ve seen a major decline to historically low tax rates in the highest individual brackets and for corporations, and the end result has been massive budget deficits and a decline in desperately needed infrastructure, education, and other funding.

I wrote about the Republican tax plan in detail prior to its passing. The majority of what was in that article made it made it into the signed law, so I’ll just provide a short recap here of the main points before focusing on the early results. Additionally, there’s a lively discussion going on in my tax brackets and standard deductions article as some readers are starting to come to terms with the numbers.

Here are the basics of the tax plan:

  • The tax rate for large corporations was lowered from 35% to 21% – a drop of 40%. And the corporate alternative minimum tax was repealed.
  • A 20% deduction of qualified business income from certain pass-through businesses was created. Specific service industries, such as health, law, and professional services, are excluded from this deduction.
  • The individual tax rates decreased anywhere from 0% (in the lowest tax bracket) to 6.6% (in the highest tax bracket). The bottom 90% of income earners would see less than a 2% increase in after-tax income, while the top 10% of income earners would see an increase between 2% and 5%, on average. Middle-income taxpayers will see an average tax change of less than $1,000, while the top 1% will get a tax break of $51,140. It’s been projected that over 80% of the total tax cut benefits will go to the top 1% of income earners.
  • The standard deduction was almost doubled, but personal and dependent exemptions were eliminated.
  • A small increase in the child tax credit.
  • The estate tax exemption was doubled from $5,600,000 to $11,200,000.
  • State and local tax deductions were capped at $10,000, with the double-whammy of sizeable tax increases for those living in highly taxed locales.
  • Tax cuts for individuals (i.e. rates, increased child tax credit, and the higher standard deduction) will expire at the end of 2025. Tax cuts for corporations, however, are permanent.
  • The Congressional Budget Office projects an increase in national debt of $1.8 trillion over the next 10 years as a result of the legislation.

On its face, this tax plan fails on who gets the bulk tax cuts (the highest income earners and corporations). That’s called “trickle down economics”. But it also fails from a fiscally conservative standpoint. It’s not revenue positive or even neutral. It will result in $1.8 trillion in new debt over the next 10 years and a massive decline in revenue from corporate taxation that will last indefinitely, (if not repealed by a future Congress).

The promise in the pitch to Americans was the trickle down. But is the plan actually trickling down to workers in the form of wage gains? The early results are not promising.

Shortly after the legislation passed, a number of companies announced $1,000 employee bonuses that now total more than $3 billion paid to workers. These bonuses (planned prior to or after the tax cut passed) were often attributed to the tax cut, and resulted in a flurry of positive PR for the plan. Give me an actual sustained wage increase over a one-time bonus any day, but any bonus is a good bonus, right?

Well, what hasn’t been in the news as much is where the rest of the corporate tax cuts are going. According to several estimates, corporations have already announced roughly $200 billion worth of stock buybacks this year – a dramatic increase over any previous full year. That’s a 67-to-1 ratio of stock buybacks versus worker gains.

Furthermore, 84% of corporate stock is owned by just 10% of Americans and the richest 1% own 40%. Why are corporations so fond of investing in stock buybacks versus workers? An analysis of the compensation of the 500 highest-paid executives found that stock-based gains accounted for 82% of their pay.

When it comes to the actual tax cut for workers, there was this infamous (now deleted) Paul Ryan tweet, celebrating the windfall that everyday Americans will enjoy from this plan:

$72 a year? Huh.

Oddly, the common defenses I’ve seen of this plan often follow some variation of this talking point.

“Every little bit helps.”

“Hey, it’s a little more money in my bank account.”

But this sentiment shows a lack of awareness of the bigger picture here. The thing is, this isn’t a free handout – you are being lent the cut from your future self. An apt analogy that I heard recently was,

“You go out for dinner with a wealthy acquaintance. “I’ll take care of everything,” he says, and orders you a hamburger. Then he orders himself an expensive steak and a bottle of wine, which he doesn’t share. And when the waiter comes with the check, he points at you and says, “Charge it to his credit card.””

Since this is not a revenue neutral tax plan, you’re not only going to have to pay back the pittance you’ll receive (with interest), but you’re also paying for the tax cut for the wealthy and corporations (who will most likely continue to pay lower effective tax rates than you in the future), with interest.

And in the meantime, the looming deficits will almost surely inspire the very same people who added to them when they voted for this tax plan to also call for Medicaid, Medicare, and Social Security cuts. So in addition to paying for yourself (with interest), your wealthy acquaintance, and his corporation, you could also see many of your essential benefits meet the axe.

Part of the insanity of all of this is that legitimate economists almost universally all believe that you should raise, not cut revenues, at times of full-employment and economic growth in order to cut budget deficits.

Yet here we are – building massive credit card debt, with a Costco membership in hand.

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