Just Taxes Blog by ITEP

Moody’s and Conservative Economists Agree: The Trump Corporate Tax Cut Is Not Helping Workers

January 26, 2018

Moody’s, one of the big three credit rating agencies, announced on Thursday that the Trump-GOP tax law will do little to improve the economy or help working people.

Analysts at Moody’s said, “We do not expect a meaningful boost to business investment because U.S. nonfinancial companies will likely prioritize share buybacks, M&A [mergers and acquisitions] and paying down existing debt… Much of the tax cut for individuals will go to high earners, who are less likely to spend it on current consumption.”

Several corporations have misleadingly claimed that their recently announced bonuses, pay raises or investment plans are a response to the massive corporate tax cut included in the Trump-GOP tax law. In some cases, it is obvious that they are simply continuing the trend of raising their wages each year as they face stiffer competition for workers. For example, Walmart raised its minimum wage in 2015 and 2016 and seems to be trying to keep up with its competitor, Target.

In other cases, it’s clear that whatever bonus or raise the company is announcing is a tiny fraction of its tax cut. Disney’s announced $125 million in bonuses and new $50 million employee education program is a fraction of the $1.2 billion tax break it will likely receive each year — not to mention its existing commitment to acquire part of  21st Century Fox for $52 billion.

The real problem with the corporate PR campaign is that even those economists who supported Trump’s corporate tax cut and claimed it would help workers do not believe that it works this way. Economists generally agree that the immediate beneficiaries of a corporate tax cut are the shareholders who will receive higher stock dividends or enjoy larger gains on their stock sales.

Some economists assert a corporate tax cut would, in the long-run, benefit workers to a degree. Their economic argument is shaky at best, but even they do not claim that workers will benefit just weeks after a corporate tax cut is enacted. Instead, they believe that lower taxes will result in more investment in American companies, which will be invested in equipment and other things that make employees more productive, and this will result in higher wages. This would take years.

Of course, if any one of these things fails to come true, the whole theory breaks down anyway. Josh Bivens at the Economic Policy Institute has pointed out that after-tax profits of corporations historically have not correlated with investments that enhance productivity, and in any event higher productivity does not always lead to higher wages, particularly in the decades since unionization declined.

And even among economists who believe workers will benefit from a corporate tax cut, most assume that benefit will be small. The Joint Committee on Taxation (JCT), the official revenue-estimators for Congress, and the Congressional Budget Office, assume that 25 percent of the benefits of a corporate tax cut would go to labor in the long-run, and the rest to the owners of corporate stocks or the owners of capital more generally. JCT assumes that long-run to be 10 years after a corporate tax cut is enacted — not a few weeks. (ITEP follows JCT’s approach but notes that the resulting estimates should be seen as a best-case scenario for working people.)

This is why even economists at conservative institutions like the American Enterprise Institute and the Tax Foundation were quoted dismissing the recent corporate announcements in a New York Times article earlier this week:

“The theory that tax cuts will increase wages is a theory based on investment, and the effect that increased investment will have on productivity,” said Michael R. Strain, an economist at the conservative American Enterprise Institute. “It is not a theory based on a pure transfer of excess profits into workers’ profits. That takes longer than two weeks to happen.”

Anecdotes of bonus payments, or even minimum wage increases, are the least-useful way to determine if a tax change is lifting workers, said Scott Greenberg, a senior analyst at the Tax Foundation in Washington. The best way is rigorous academic study, which Mr. Greenberg noted takes years to complete.

For once, ITEP, Moody’s, AEI, and the Tax Foundation all seem to agree on something: The recent corporate announcements of bonuses and raises are irrelevant to the tax debate.


Full Archive

All Blog Posts