Dean Baker
HuffPost, December 21, 2017
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.
Dean Baker
Truthout, January 8, 2018
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.
Dean Baker
Truthout, December 26, 2017
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.
