Quote:
Originally Posted by Tiny
Great post. You're spot on.
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So you think Trumps tax cuts slowed inversion? Hmmmmmmm
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> BLOG > THE GREAT FAILURE OF DONALD TRUMP’S BIG TAX CUT
• ARTICLE CoronavirusHealth and Social Programs Beat the Press
The Great Failure of Donald Trump’s Big Tax Cut
03/19/2020 12:00AM
DEAN BAKER
The fact that Donald Trump’s tax cut did not produce the investment and growth that was promised is widely known. There was a modest uptick in growth in 2018, from 2.4 percent the prior year to 2.9 percent in 2018, but this pace fell back to 2.3 percent last year. Virtually, all forecasts showed the growth rate falling still lower in 2020, even before the coronavirus began to impose large economic costs.
This is well below the 3.0 percent growth, for as far as the eye can see, promised by the Trump administration. In fact, the 2.5 percent average growth rate for the first three years of the Trump administration is only slightly better than the 2.3 percent average growth rate for the last three years of the Obama administration.
More important than the growth figures is the fact that there is zero evidence that it gave any substantial boost to investment. The investment share of GDP crept up slightly from 13.2 percent of GDP in 2017 to 13.5 percent in 2018, but it was back down to 13.4 percent last year. And, in the fourth quarter of 2019 it was back to 13.2 percent. The investment share never got as high as the 13.7 percent reached in 2014 under Obama. There certainly is not much of a boom story here.
Some tax cut proponents insist that the tax cut would have led to the promised boom had it not been for Donald Trump’s trade war. While there is little doubt that the trade war has had a negative effect on investment and growth, the impact would have to be far larger than any models project in order for the trade war to have been the only thing that stifled an investment boom. Also, from the standpoint of touting Donald Trump’s economic record, it is a bit hard to maintain that his tax cut would have led to a great investment boom, if not for damage caused by his ill-conceived trade war.
The story of the tax cut and the economy is simple. We gave a large tax cut, a bit less than $200 billion a year (around 0.9 percent of GDP), with the main beneficiaries being rich people. And, the rich spent a reasonable portion of their tax cut, leading to a boost in consumption and a boost to growth. This proves the old theory that if we give people more money, they will spend more. Of course, that is more true if we give the money to low and middle income people, but even high income people will spend more when they have more money.
The tax cut did lead to a large increase in the budget deficit, which is not necessarily a problem, except that we could have instead done things with this money like provide free child care, extend health care coverage, provide large subsidies to promote clean energy and conservation. In effect, we targeted increasing consumption by the rich instead of these alternative uses of resources.
The Tax Gaming Continues!
While the investment and growth failures of the tax cut are widely known, there is another failure of the tax cut which has gotten less attention. The main selling point of the corporate tax cut, which was at the center of the Trump plan, was that it would lead to an investment boom, leading to more rapid productivity growth and higher wages, but there was another more plausible story they also pushed.
The pre-Trump corporate tax rate was 35 percent, but few businesses were paying taxes at anything close to this rate. The overall average was close to 21 percent. The 35 percent statutory rate put us at the top of the OECD. However, our actually tax collections were slightly below the median.
The Trumpers argued that they would lower the rate, but would eliminate the loopholes, so that we would actually collect something close to the new 21 percent statutory rate. If this were true, it would actually be a change for the better.
The point is that whatever our tax take actually is, we want to minimize the resources involved in collecting this tax. When corporations employ elaborate tax avoidance or evasion strategies to get their tax rate down, they are employing considerable resources in this effort. This is a complete waste from an economic perspective. We have highly educated people working as tax lawyers and accountants instead of engaged in work that could have social benefits, such as improving medical technology or teaching.
These tax avoidance and evasion strategies also contribute to income inequality, since there is big money in designing them. If a clever accountant can find a way to save Apple or Google $400 million on their taxes, then these companies would come out ahead paying them $399,999,999. We shouldn’t design our economy so that tax gaming is one of the best ways to make a big fortune.
Anyhow, whether or not their promises on eliminating tax gaming were ever sincere, it is now clear that they were not accurate. We have lowered the tax rate, as they intended, but tax gaming continues to be as robust as ever.
We can see this clearly from the Congressional Budget Office’s (CBO) projections on corporate tax collections. In April of 2018, after the tax cut had been passed into law, CBO projected that we would collect $307 billion in corporate taxes this year. In January of this year, it projected that we would collect $234 billion in corporate taxes, a difference of more than 20 percent. This comes to less than 11 percent of projected profits.
The failure to limit tax gaming is also apparent in the continuing growth in the foreign share of corporate profits. The simplest and most common form of tax gaming is to have profits recorded in a tax haven like Ireland or the Cayman Islands. It is very difficult for governments to determine where profits were actually earned. For this reason, companies would rather have their profits booked in a country with a very low tax rate.
The latest data on profits from the Federal Reserve Board show that the tax cut did not discourage companies from booking their profits abroad. In fact, the foreign share of corporate profits rose from 21.3 percent in 2017, the last year before the tax cut, to 26.1 percent last year.
The Corporate Income Tax, if Poorly Designed, Schakles the Macroeconomy with Too Much Deadweight Loss
