Corporations Are Trying To Sell The GOP’s Narrative On Tax Cuts [feedly]

Corporations Are Trying To Sell The GOP's Narrative On Tax Cuts
http://cepr.net/publications/op-eds-columns/corporations-are-trying-to-sell-the-gop-s-narrative-on-tax-cuts

Corporations Are Trying To Sell The GOP's Narrative On Tax Cuts

Dean Baker
HuffPost, December 21, 2017

See article on original site

The Republican lawmakers have sold the corporate portion of their tax cuts with the claim that it is actually about helping workers. Their argument is that the corporate tax cut will lead to so much growth that the increase in wages will actually be considerably larger than the tax cut itself. The GOP's story is that lower corporate taxes inevitably mean more investment, which means higher wages for more workers, as well as increased imports and greater productivity.

The vast majority of economists have questioned this basic logic, because in the past, investment has not been highly responsive to after-tax rates of profit. But that didn't stop the Republican-controlled Congress from passing the tax bill. And now, in an effort to build public support for the corporate tax cut, several major corporations have been announcing bonuses and pay raises for workers.

AT&T announced that it would give a one-time bonus of $1,000 to 200,000 workers. Its rival Comcast also promised a $1,000 bonus for 100,000 workers. Fifth Third Bancorp promised a $1,000 bonus for 13,500 employees, while raising its minimum wage to $15 an hour. Wells Fargo said it would raise its minimum wage to $15 an hour, too. Boeing announced a $300 million fund to be spent on training workers, upgrading facilities and matching workers' charitable contributions.

While the employees getting these increases will undoubtedly be pleased, there are a few caveats that must be kept in mind.

First, many of these announcements refer to one-time bonuses, not permanent pay hikes. This is not what the GOP promised. The corporate tax cuts were made permanent on the grounds that companies needed the expectation of higher future after-tax profits in order to justify greater investment today. If the economy is following the course predicted by the Republicans, all these pay increases should be permanent, too.

The second caveat is that some of the increases may have little to do with the tax cut. They can be attributed instead to the tightening labor market, along with higher minimum wage laws. This is especially true of Wells Fargo, which is based in California. The state has already passed into law a $15 minimum wage, which is scheduled to be fully phased in by 2022.

Wells Fargo will be getting there a bit more quickly if it adopts its $15 minimum in 2018. It will also be applying that hike in parts of the country where the federal minimum wage of $7.25 an hour still sets the standard, but even in these other areas, a tightening labor market is putting upward pressure on wages. Last summer, Target announced that it would get to a minimum wage of $15 an hour by 2020. That announcement had no obvious connection to any expectation of a corporate tax cut.

Third, but perhaps most significantly, these pay hikes are not especially large relative to the size of the corporate tax cut. Take the example of AT&T: In 2016, the company reported operating income, net of interest, of $19.4 billion. It paid $6.5 billion in taxes, which means an effective tax rate of 33.5 percent.

If it had instead paid the 21 percent tax rate in the new bill, AT&T's savings would be $2.4 billion. The promised bonus for 200,000 employees comes to $200 million, or less than one-tenth the size of the tax cut. This is very much in line with the expectations of tax bill critics, who predicted that the overwhelming majority of the money that corporations now get to keep will end up as higher profits paid out to shareholders, not as permanently higher wages for workers.

But the real question is not the immediate split between wages and payouts to shareholders. The Republican story of tax cut blessings rests on a great surge in investment. We should begin to know if that is going to happen very soon. After all, companies were obviously following the tax cut debate over the last two months and presumably began to make plans as to what they would do if the bill passed.

So if there is going to be the huge upsurge in investment predicted by tax cut supporters, it should be showing up in the data on orders for capital goods almost immediately. And it should be a very large upturn, not just the normal increase to be expected in an economy that has been strengthening for the last eight years.

Until we get those data, we have little basis to judge whether the tax cut will deliver the economic growth and pay increases the Republicans said would happen. This display of corporate beneficence to workers and communities is nice, but it has to be understood as part of a public relations campaign. It tells us nothing about whether the tax cut will ultimately deliver to workers the gains promised by its proponents.

 -- via my feedly newsfeed

Big Tax Game Hunting: Employer-Side Payroll Taxes [feedly]

Big Tax Game Hunting: Employer-Side Payroll Taxes
http://cepr.net/publications/op-eds-columns/big-tax-game-hunting-employer-side-payroll-taxes

Big Tax Game Hunting: Employer-Side Payroll Taxes

Dean Baker
Truthout, January 8, 2018

See article on original site

The Republican Congress gave themselves and their contributors a huge Christmas present with the tax cut bill they pushed through at the end of last year. They decided to cover the costs in part by whacking Democratic states like California and New York, which have relatively high state and local taxes.

The big hit was limiting the amount of state and local taxes that could be deducted. As a result, many upper-middle-class families and rich families will be paying thousands more in taxes each year.

While most of these people probably can and should pay more in taxes, this tax increase was explicitly designed to make it more expensive for progressive states to provide services like health care and education to their people. In this context, it's time to take the gloves off. These states absolutely should look to fight back by finding ways to avoid the tax increase.

Fortunately, there is a way. States can look to replace much of their income tax with an employer-side payroll tax. This will effectively preserve the tax deductibility of the income tax and even extend this benefit to people who don't itemize.

To take a simple case, suppose that a state has a 5 percent flat income tax. A person earning $200,000 a year would pay $10,000 a year in taxes. Under the former system, this $10,000 was fully deductible from federal income taxes, under the theory that this was money they never saw: The state taxed it away.

Now, much of this could be taxable, since the new law limits total deductions for state and local taxes, including property taxes, to $10,000. Depending on how much this person paid in property taxes and other deductible taxes, they may be able to deduct little or none of the money they pay in state income taxes.

Suppose we replace the 5 percent income tax with a 5 percent employer-side payroll tax. The person's employer will now have to pay 5 percent of the worker's salary or $10,000 to the state.

Economists usually think that employer-side payroll taxes are taken pretty much dollar-for-dollar out of workers' wages. The idea is that if an employer is willing to pay $200,000 to hire a worker, they don't especially care whether they are paying that money to the worker or to the government. If the company now has to pay the government a $10,000 payroll tax, they will look to lower the worker's pay to $190,000.

It is worth noting that this adjustment may not apply everywhere and typically is not going to happen immediately. In other words, we wouldn't expect that employers will suddenly cut their workers' pay by 5 percent. Rather, workers might see smaller pay increases than would otherwise be the case so that after two or three years their pay ends up being 5 percent less than otherwise would have been the case. (Actually, since employers just got a big tax cut, it would be nice to see them eat some of this payroll tax and let workers enjoy some real wage gains.)

Anyhow, this matters for federal taxes, because after this adjustment takes place this worker would only have $190,000 of taxable income, rather than $200,000. This worker is left with the same amount of money after paying their state taxes as when they had the income tax, but their federal tax burden will be substantially less. If this person is in the 25 percent tax bracket, this little trick saves them $2,500 a year on their taxes.

This benefit even goes to people who don't itemize. Imagine a more middle-income person who earned $60,000 a year before the employer-side payroll tax was put into effect. They would see their taxable income fall to $57,000. If they are in the 22 percent tax bracket, they will save $660 a year from this switch.

There will be some complications from this policy. Many people work in one state and live in another. We would want to make sure that this means neither that they escape state taxation nor get taxed by two states. This will require some work, but it is a problem that already exists under the current system.

There also is a problem of preserving progressivity. For many reasons it is best to keep a flat payroll tax, but we would want lower-income people to pay a smaller share of their income and higher-income people to pay a larger share. This can be addressed with an Earned Income Tax Credit, which many states already have, and maintaining an income tax for high earners, as well as for income from stocks and other property.

There are undoubtedly other details that have to be worked through and the end product will surely not be perfect. But an employer-side payroll tax is a great way for progressive states to fight back against this Republican tax scam.

 -- via my feedly newsfeed

Dean Baker: Diverting Class Warfare Into Generational Warfare: Round LVIII [feedly]

Diverting Class Warfare Into Generational Warfare: Round LVIII
http://cepr.net/publications/op-eds-columns/diverting-class-warfare-into-generational-warfare-round-lviii

Diverting Class Warfare Into Generational Warfare: Round LVIII

Dean Baker
Truthout, December 26, 2017

See article on original site

With the Republicans having just passed a $1.5 trillion tax cut, the bulk of which goes to the richest one percent, it was inevitable that the generational warriors would come out of the woodwork and resume the attack on Social Security and Medicare. Generational warriors try to divert attention away from how our economy has redistributed income upwards over the last four decades, and convince a large portion of today's workers that their real problems stem from their parents' and grandparents' overly generous retirement benefits.

The opening shot in this new round of generational warfare showed up earlier this month in The Atlantic Magazine. It told the classic story about how seniors are getting too much money back from Social Security and Medicare, the same thing we've been seeing for decades. (There is little expectation of originality if you're in the business of promoting generational warfare.)

In fact, middle-income seniors will get somewhat less back from Social Security than they paid into the system. The cost of Medicare benefits does exceed their taxes, but this is because Americans pay twice as much for our doctors, drugs, medical equipment and other health care items than people in other wealthy countries.

The real problem is high-income people in the health care sector making too much money, not the country being too generous to its seniors. But, the folks promoting generational warfare aren't interested in clamping down on the rich doctors and drug companies; they want us to go after retired school teachers and retail clerks.

Even if Social Security and Medicare were more generous, it would still say almost nothing about generational equity. While the generational warriors would like to have everyone focus on the cost of programs that primarily serve the elderly, paying for these programs has a trivial impact on the well-being of the working population. Policies that affect the distribution of income within generations are vastly more important.

To make this point as simple as possible, suppose that we had a huge increase in payroll taxes to cover projected shortfalls in Social Security and Medicare. Imagine a combined increase of 4.0 percentage points, which would be more than sufficient to leave both programs fully funded throughout their 75-year planning horizon.

This would undoubtedly be a big hit to working people who have to pay this tax. But, let's compare this to the upward redistribution of income over the last four decades. This has primarily been an upward redistribution within the wage distribution, from ordinary workers to CEOs, Wall Street trader-types, and highly paid professionals like doctors and dentists. In the last decade there has also been a substantial redistribution from wages to profits.

The result of this upward redistribution has carved a large gap between productivity growth and wage growth. The hourly pay of a typical worker has risen by roughly 6.0 percent from 1979 to 2017. Even if we take a broader measure of compensation that includes health care and other benefits, the increase would be less than 20 percent.

By comparison, productivity has risen by more than 60 percent, even after making adjustments for technical factors like differences in deflators and net versus gross measures of output. This means that the upward redistribution over this period has reduced wage growth by more than 40 percentage points. In short, our children are 40 percent poorer than they would otherwise be because of the money going to people like Bill Gates and Steve Zuckerberg rather than ordinary workers.

So by very conservative estimates, a typical person in their twenties or thirties has seen their income reduced by more than 40 percent because of all the money redistributed to those at the top. However, the generational warriors want young people to be upset about the possibility that a bit more than one-tenth of this amount could be used to pay for their parents' and their own Social Security and Medicare. (This upward redistribution is also responsible for about half of the projected shortfall in Social Security, as more income going to profits and high-income workers escapes the Social Security tax.)

It is also important to understand that government action was at the center of this upward redistribution. Without government-granted patent monopolies for Windows and other Microsoft software, Bill Gates would probably still be working for a living.

We spent over $450 billion on prescription drugs in 2017. Without government-granted patent monopolies we would probably have spent less than $80 billion. The difference of $370 billion is equal to an increase of a 5.0 percentage point increase in the Social Security payroll tax. But the generational warriors don't want anyone talking about how much money our children to pay drug companies with government-granted patent monopolies.

In fact, the generational warriors have directly cost our children more than 10 percent of their paychecks with their harebrained fiscal policies. They insisted on a smaller stimulus and austerity following the collapse of the housing bubble in 2007 to2009. This slowed the recovery, reducing both employment and investment, leaving the economy permanently poorer.

But no, we're not supposed to talk about any of the items that will hurt the living standards of our children and grandchildren. The generational warriors insist that our children's problem is their parents' Social Security and Medicare. Their argument doesn't make much sense, but you can get lots of money for saying it, and you can count on getting your stale recycled arguments printed in the nation's leading publications.

 -- via my feedly newsfeed

Dani Rodriik: In defense of economic populism

In Defense of Economic Populism

Dani Rodrik

Populists' aversion to institutional restraints extends to the economy, where they oppose obstacles placed in their way by autonomous regulatory agencies, independent central banks, and global trade rules. But while populism in the political domain is almost always harmful, economic populism can sometimes be justified.

CAMBRIDGE – Populists abhor restraints on the political executive. Since they claim to represent "the people" writ large, they regard limits on their exercise of power as necessarily undermining the popular will. Such constraints can only serve the "enemies of the people" – minorities and foreigners (for right-wing populists) or financial elites (in the case of left-wing populists).


Periodic elections under populist rule become a smokescreen. In the absence of the rule of law and basic civil liberties, populist regimes can prolong their rule by manipulating the media and the judiciary at will.This is a dangerous approach to politics, because it allows a majority to ride roughshod over the rights of minorities. Without separation of powers, an independent judiciary, or free media – which all populist autocrats, from Vladimir Putin and Recep Tayyip Erdoğan to Viktor Orbán and Donald Trump detest – democracy degenerates into the tyranny of whoever happens to be in power.

Populists' aversion to institutional restraints extends to the economy, where exercising full control "in the people's interest" implies that no obstacles should be placed in their way by autonomous regulatory agencies, independent central banks, or global trade rules. But while populism in the political domain is almost always harmful, economic populism can sometimes be justified.

Start with why restraints on economic policy may be desirable in the first place. Economists tend to have a soft spot for such restraints, because policymaking that is fully responsive to the push and pull of domestic politics can generate highly inefficient outcomes. In particular, economic policy is often subject to the problem of what economists call time-inconsistency: short-term interests frequently undermine the pursuit of policies that are far more desirable in the long term.

A canonical example is discretionary monetary policy. Politicians who have the power to print money at will may generate "surprise inflation" to boost output and employment in the short run – say, before an election. But this backfires, because firms and households adjust their inflation expectations. In the end, discretionary monetary policy results only in higher inflation without yielding any output or employment gains. The solution is an independent central bank, insulated from politics, operating solely on its mandate to maintain price stability.

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The costs of macroeconomic populism are familiar from Latin America. As Jeffrey D. Sachs, Sebastián Edwards, and Rüdiger Dornbusch argued years ago, unsustainable monetary and fiscal policies were the bane of the region until economic orthodoxy began to prevail in the 1990s. Populist policies periodically produced painful economic crises, which hurt the poor the most. To break this cycle, the region turned to fiscal rules and technocratic finance ministers.

Another example is official treatment of foreign investors. Once a foreign firm makes its investment, it essentially becomes captive to the host government's whims. Promises that were made to attract the firm are easily forgotten, replaced by policies that squeeze it to the benefit of the national budget or domestic companies.

But investors are not stupid, and, fearing this outcome, they invest elsewhere. Governments' need to establish their credibility has thus given rise to trade agreements with so-called investor-state dispute settlement (ISDS) clauses, allowing the firm to sue the government in international tribunals.

These are examples of restraints on economic policy that take the form of delegation to autonomous agencies, technocrats, or external rules. As described, they serve the valuable function of preventing those in power from shooting themselves in the foot by pursuing short-sighted policies.

But there are other scenarios as well, in which the consequences of restraints on economic policy may be less salutary. In particular, restraints may be instituted by special interests or elites themselves, to cement permanent control over policymaking. In such cases, delegation to autonomous agencies or signing on to global rules does not serve society, but only a narrow caste of "insiders."

Part of today's populist backlash is rooted in the belief, not entirely unjustified, that this scenario describes much economic policymaking in recent decades. Multinational corporations and investors have increasingly shaped the agenda of international trade negotiations, resulting in global regimes that disproportionately benefit capital at the expense of labor. Stringent patent rules and international investor tribunals are prime examples. So is the capture of autonomous agencies by the industries they are supposed to regulate. Banks and other financial institutions have been especially successful at getting their way and instituting rules that give them free rein.

Independent central banks played a critical role in bringing inflation down in the 1980s and 1990s. But in the current low-inflation environment, their exclusive focus on price stability imparts a deflationary bias to economic policy and is in tension with employment generation and growth.

Such "liberal technocracy" may be at its apogee in the European Union, where economic rules and regulations are designed at considerable remove from democratic deliberation at the national level. And in virtually every member state, this political gap – the EU's so-called democratic deficit – has given rise to populist, Euroskeptical political parties.

In such cases, relaxing the constraints on economic policy and returning policymaking autonomy to elected governments may well be desirable. Exceptional times require the freedom to experiment in economic policy. Franklin D. Roosevelt's New Deal provides an apt historical example. FDR's reforms required that he remove the economic shackles imposed by conservative judges and financial interests at home and by the gold standard abroad.

We should constantly be wary of populism that stifles political pluralism and undermines liberal democratic norms. Political populism is a menace to be avoided at all costs. Economic populism, by contrast, is occasionally necessary. Indeed, at such times, it may be the only way to forestall its much more dangerous political cousin.

DANI RODRIK

Writing for PS since 1998 
139 Commentaries

Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy, Economics Rules: The Rights and Wrongs of the Dismal Science, and, most recently, Straight Talk on Trade: Ideas for a Sane World Economy.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

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The American Economics Association

Greetings Socialist Economics readers:

I was fortunate to attend several sessions at this year's American Economics Association annual meeting, held in Philadelphia. The conference is a major international gathering of academic and professional economists of every trend, headliners and aspiring grad students, the famous and some infamous. The workshops and panels address a full menu of topics in the social sciences from the controversial to the highly technical. Vendors of professional services and software offer to help you through the universe(s) of Big Data.

I focused my attention on the panels addressing inequality, innovation and technology impacts on labor, and those devoted to the study of "populism".

Emmanuel Saez chaired and participated in several sessions related to his work on inequality trends across the world. Together with Thomas Piketty and researchers at the Paris School of Economics, Dr Saez has helped gather the most authoritative and comprehensive data and analysis of global trends on inequality. In short, his report is devastating. There is no place, none, where trends do not reflect an INCREASE in inequality. The shares of wealth created by society, nevermind accumulated assets, are being divided between capital and labor even MORE unequally. Its getting worse, not better. This trend ---- the gains of productivity and technology going disproportionately to the rich -- has been an all but static and permanent feature of life for 45 years -- since 1973 in the US. But its global too. The social democracies of the EU, and "socialisms with a Chinese and Vietnamese face" market-socialisms of China and Vietnam have slower RATES of increased inequality, but increased nonetheless. Socialisms of the post-Soviet Russian variety [most industrial and strategic assets are still 90% owned, controlled, or heavily influenced by the state] show some of the worst aggravated inequality trends. If you look at trends affecting the bottom 50% of the world's incomes, only China, Vietnam, India and South Korea show significant growth in working class incomes. It is these nations, and especially China, whose very high growth rates and fairly strong state management policies that have prevented poverty rates from also rising globally. The power of global, and globalized capital -- one should probably say capitalS with a plural -- to play nations off against each other is staggering. There is not yet much light at the end of the tunnel into which this force is taking us.

The Economics of Populism was a theme in several panels where there was considerable controversy. First, there is a weakness in the classless perspective which can't distinguish between 'populist movements' (for example, the Tea Party)  funded by billionaires, and actual grass-roots funded campaigns (Sanders, for example) -- 'economic populism' in Dani Rodrik's vocabulary. Still, while economists and political scientists on the panels had different emphases, two things came through strongly: 1) There is a strong correlation world wide between economic shocks, unemployment, and adverse economic trends with the rise of movements reflecting deep discontent with prevailing norms and institutions. 2) Not every nation experiencing bad economic times responds with 'populism' of any variety -- the loss of confidence in institutions tends to precede the economic shocks, and become  an entrenched corruption. A failing state.

The impact of machines and artificial intelligence on the division of work in society was a third area where nearly unimaginable realms appear within reach --- the release of humanity from hard, dangerous, dehumanizing labors. But nearly all light is clouded by both no less than THREE market failures. 1. The historic tendency of wages and salaries to rise in correlation with rises in productivity -- i.e. workers eventually follow new jobs created in new higher productivity sectors) --  is not 'recently' working as models predict; and 2)the looming sounds of 'externalities' crashing just outside the rooms of the hotel --- the global economy, not to mention outbreaks of war, weather, famine and pestilences like fascism -- are all considered "exogenous" to to 'natural' market forces --yet they more often than not dominate economic headlines...; and 3) the robots promise ultimately to accomplish any repetitive, algorithmic task, physical or mental. That leaves an ever increasing portion of both product and labor devoted to intangibles and services performed directly for each other.  The productivity of both intangibles and services cannot be accurately measured at this time beyond their direct cost -- and with intangibles even that can be very difficult to determine. In this 'model' of an economy -- what happens to all the people, the multitudes upon multitudes who depend on CASH to live!??

No matter where you look for progress, or hope: the billionaires stand in the way.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

7-9 AM Weekdays, The Enlighten Radio Player Stream, 

Sign UP HERE to get the Weekly Program Notes.

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