The White House is selling a tax cut designed for the rich as a boost for the working class. Cut taxes on capital, the White House claims, and investors will raise investment, hire more workers, and bid up wages — a.k.a. trickle-down economics. If the real goal is to use tax cuts to boost low wages, then do it directly, for example by expanding the Earned Income Tax Credit.
Of course, there is a basic problem with tax cuts now. They will lead to larger budget deficits even before they lead to more growth. They will lower national saving, raise interest rates, crowd out private investments, expand the trade deficit (boosting imports and appreciating the dollar), and signal the need for future tax increases or budget cuts. The cuts in government outlays are likely to fall on critical growth-promoting needs, such as education (human capital), health care, and infrastructure.
Since we already face a large and growing federal budget deficit, we should be talking about selective tax increases, for example by closing tax loopholes such as “carried interest” for hedge fund managers, a wealth tax on ultra-high net worth, and a tax on carbon emissions, in order to reduce the deficit and finance vital public investments and an expanded EITC.
The President’s Council of Economic Advisors is now peddling a shoddy document as part of the Republican Party’s propaganda onslaught. The CEA report purports to show that average household wages and salaries would rise by at least $4,000 as a result of cutting the corporate tax rate from 35 percent to 20 percent. This report is a piece of analytical fluff.
The CEA report is based on a simple idea: that cutting US corporate tax rates relative to those of other countries would shift capital from those countries to the United States. Wages and output abroad would fall while wages and output in the United States would rise, or at least that’s the basic idea.
The policy is what economists call “beggar-thy-neighbor,” meaning that purported gains to the United States would amount to losses incurred by the other countries. Yet other countries could readily protect themselves by cutting their own corporate tax rates further. The result, of course, would be a “race to the bottom” in corporate tax rates, ending perhaps at zero corporate taxation by all countries.
Who would win in a race to the bottom? The capitalists, of course. Who would lose? Workers, future generations, and society at large, who would be deprived of the budget revenues needed to pay for infrastructure, science and technology, clean energy, higher education, and other vital programs.
Even if the other countries don’t fully retaliate with their own tax cuts, the salary gains that the CEA asserts would accrue to US workers are dubious at best. The CEA relies on empirical studies that are out of date and insufficiently precise. In the US economy today, corporate investments are leading to technological unemployment of
lower-skilled workers, as robots and smart machines increase their range of capabilities.
Therefore, even if the United States could attract capital from abroad, the main beneficiaries would be high-skilled (and high-salaried) workers rather than the lower-wage workers. To truly help the working class, the federal government should be expanding job benefits such as paid family leave, sick leave and vacation time, and the EITC.
Moreover, any gains to US workers (even the high-skilled workers) would come over the course of many years or even decades (what the CEA report calls the “medium term”), while the rich shareholders would benefit immediately as a result of the tax cuts, both in corporate cash flow and in higher stock market valuations. Such is the inherent nature of “trickle-down” policy: huge and immediate gains at the top of the income distribution, and drip, drip, drip at the bottom.
The CEA analysis fails to notice a miserable weakness of the White House tax proposal. By ending the taxation of US corporate earnings abroad, and taxing only the earnings in the US, it would incentivise companies to use accounting tricks to book their incomes abroad. They already do this because corporate taxes on foreign income are deferred (paid later). Yet such “tax shifting” will be even more egregious when the company can achieve the total avoidance of taxation rather than the mere deferral of taxes.
Why, then, are the White House and congressional Republicans pushing so hard for this misguided and badly timed corporate tax cut? Obviously, the overwhelming reason is that rich backers of the Republican Party (think Koch brothers, Sheldon Adelson, Robert Mercer, and of course Trump himself) stand to make a windfall even if the consequences of the tax cuts are bad for most of the society.
What if the budget deficit widens significantly? The poor and the young will end up paying the bills, not the rich and the old. What if other countries retaliate in a race to the bottom? Again, the rich corporate owners will benefit while the workers lose. What if the low-skilled workers face automation rather than a boost in jobs? The rich still gain. What if the wage increases take decades to trickle down? The capital windfall comes up front in any case. And what if ending the taxation of foreign-earned income increases accounting flimflammery? All the better for the corporate owners.
What should we do instead? While there is a case for a modest cut in the US corporate tax rate to harmonize the US tax rate with other countries, any such cut should be part of an international agreement to avoid a race to the bottom. Moreover, the lost revenues should be more than offset by selective tax increases elsewhere in order to cut the budget deficit and fund urgently needed federal programs. To get the right tax policies, we will have to move from propaganda to serious policy analysis, something that is almost nonexistent in lobby-driven Washington today.
Jeffrey D. Sachs is university professor and director of the Center for Sustainable Development at Columbia University, and author of “The Age of Sustainable Development.”