Kansas Provides Compelling Evidence of Failure of "Supply-Side" Tax Cuts MICHAEL MAZEROV Center on Budget and Policy Priorities, January 22, 2018 The deep income cuts that Kansas enacted in 2012 and 2013 for many business owners and other high-income Kansans failed to achieve their goal of boosting business formation and job creation,…
Republican congressional leaders and President Trump have madeloud claimsabout how great the recently passed Tax Cuts and Jobs Act (TCJA) will be for typical American families. When will these families be able to conclusively judge the truth of these claims? Not for a long while. The changes from the new tax law took effect on January 1. Companies now have to figure out how much to change workers' tax withholdings to comply with the new law. To do that, they need guidance from the Internal Revenue Service (IRS).
But this is the same IRS that has seen its budget cut by 18 percent and its workforce cut by 14 percentsince 2010. And it's the same IRS that would send homeover halfof its workforce if the government shuts down again. While a deal was reachedto endthe current shutdown, that deal only funds the government through February 8th. All as the 2018 tax filing system ramps up and 2017 tax returns flood into the agency.
Typically, this shouldn't be much of an issue. A shutdown would usually onlypush back the timing of withholding changes. The IRS would understandably take more time to issue guidance, and companies would simply implement the new withholdings later in the year.
But the Trump administration has already been pressuring the IRS to aim forspeed over accuracyin new withholdings. Further, they would love companies to err on the side of withholding too little and boosting workers' take-home pay, even if this meant that these workers have to make large payments back to the government in 2019. After all, the salience of the TCJA is as high as it's going to be, and this administration is not shy at all about putting political expedience over smart policy. And telling workers that the tax cut is already working for themis awfully expedientin a mid-term election year. If the administration continues to focus on speed, then what was already a risk of under-withholding would be augmented by a government shutdown.
The administration has ample ability to apply that pressure, as the Treasury's current Assistant Secretary for Tax Policy, David Kautter, is also, bizarrely,moonlightingas the acting commissioner of the IRS.
Finally, even after the IRS issues guidance, companies have to implement that guidance. And there's another considerable risk to watch for here.
Many companies are already firmly onboard the marketing campaign to trumpet the wonder of the TCJA, claiming loudly that each bonus they have sent out stems from corporate tax cuts. Such claims arenothing but PR. (We'll explain why we know this in more detail in an upcoming blog post.) But the simplest explanation is that this is just not how the economic theory linking corporate tax cuts to wage gains works. To be clear, wedon't believe this theory applies to the current situation, but even if it did, it would not work like this. Can households really trust companies that have proved so willing to lie to workers in the name of defending the TCJA to be scrupulous about withholding the proper amount of tax from workers' paychecks? After all, under-withholding just means their employees have to mail larger checks to the IRS in 2019. Do we really think companies doing PR work for the TCJA care about that?
The IRS was already understaffed by years of budget cuts and could become severely understaffed by another government shutdown in February. All while they're under political pressure to keep withholdings as low as possible and get new withholding guidance out the door quickly. And the companies that have already engaged in PR for corporate tax cuts aren't exactly trustworthy for ensuring withholdings aren't too large. This combination means that there's considerable risk that many households under-withhold this year. Households should take this risk seriously, or they'll be left trying to find money to pay the difference in 2019. In short, the combination of the TCJA and truly cynical partnerships between Republicans and their cheerleaders in the corporate world have made the 2019 tax season a potential time-bomb for typical American families.
A lot of progressives are angry or disappointed this morning. They're upset that "spineless" Democrats in Congress didn't take a stand — by keeping the federal government closed until Republicans agreed to protect the young immigrants known as Dreamers.
I fully understand their anxiety on behalf of those immigrants, the Dreamers. The future of the Dreamers remains unclear. But it's worth taking a minute to understand the very large assumption that unhappy progressives are making. When you examine that assumption — and recent congressional history — I think you end up seeing that Democrats made a smart move to reopen the government. Unfortunately, their choice wasn't, as the critics claim, between protecting or abandoning the Dreamers.
The critics' big assumption is that the Republicans would have eventually folded if the government had remained shut down. The theory goes something like this:
Republicans are running the country right now, and a long shutdown would hurt them more than it hurts Democrats. At some point, feeling the political heat, Republicans would have agreed to what the Democrats wanted, including protection for the Dreamers.
No one can know what would have happened in a hypothetical scenario, but there are many reasons to be skeptical of these assumptions.
First, it's the same case that conservative activists made during the Obama and Clinton presidencies. In 2013, conservatives were trying to get Democrats to defund Obamacare and thought they could force the governing party to do so by shuttering the government.
The effort failed, under Obama and Clinton, for a simple reason. Democrats understood that if they gave in, they would allow the Republicans to repeat the exercise whenever they wanted: Shut the government until the governing party paid ransom. The minority party would effectively be in control.
The same dynamic holds here. Shutdowns have never "been an effective way to pressure the other side into concessions," the longtime political reporter Ron Brownstein tweeted yesterday. "If anyone should recognize that it's Democrats who watched R's flail and fail to move Clinton & Obama."
Cathleen Decker of The Los Angeles Times put it this way: "In all the anger coming from liberal Dem groups today," she wrote that she had "yet to see a scenario under which a longer shutdown would have resulted in a more positive outcome from their point of view."
The second reason to be skeptical of the critics is that their big assumption depends on the belief that a long shutdown would have put more political pressure on the Republicans and Democrats. As evidence, the critics cite polls showing that most voters believe the Dreamers deserve to remain in this country.
Of course, polls also showed Obamacare to be unpopular in 2013. More important, recent polls showed that most voters didn't believe the government should be shut down over the Dreamers. Most polls also showed support for the Democrats slipping as the debate dragged on. And as I explained in my column yesterday, there is abundant evidence that a prolonged debate over illegal immigration helps Republicans, not Democrats.
In the end, I think a long shutdown was more likely to hurt the Dreamers than to help them. Congress would not have passed a law to protect them before reopening the government, and the Dreamers' allies in Congress — the Democrats — would be in a weaker position than they are now.
That said, the critics' disappointment stems from a profoundly decent instinct. They're worried about Dreamers being ripped from their lives in this country. I share the worry — and the anger at Republican leaders who refuse to solve this problem.
But it's just not the case that a minority party can force the majority party to do what it wants if only it summons enough righteous anger. It never has been. It's another version of the Green Lantern Theory of politics — that if you care enough and try hard enough, you can do anything.
The best hope for the Dreamers was not a shutdown that was somehow supposed to end differently from every other recent shutdown. The best hope, first, is to see if there is a solution over the next few weeks, away from the chaos and heat of a shuttered federal government.
If that doesn't work, there is only one reliable way to change a policy that the majority party won't change: Turn that party into the minority party.
Paul Krugman, Ezra Klein, Catherine Rampell, Nate Cohn and Perry Bacon Jr. make cases similar to mine. Among other things, some of them point out that Democrats won a six-year extension of the children's health insurance program as part of the deal, which is no small feat.
My biggest question for Democratic leaders is whether they could have made the same deal a couple of days ago. If so, it would have been better. But it probably doesn't matter either way. A two-day shutdown isn't going to affect the political scene months from now.
My colleagues David Brooks and Michelle Goldberg make a different case from mine, arguing, from different perspectives, that the Democrats got rolled.
Ludwig von Mises Institute: Given this sorry record, it is hardly surprising that the renewed outbreak of world war in September 1939, which returned Churchill to the British cabinet as First Lord of the Admiralty, brought a new hunger blockade of Germany.... Franklin Roosevelt rivaled his British counterpart in his disregard for the rules of civilized warfare....
Long before the Japanese attack on Pearl Harbor on that "date which will live in infamy," December 7, 1941, Roosevelt hoped that the Chinese would bomb the major cities of Japan. Because of the presence of closely packed together wooden buildings, entire cities could readily be set afire.... Roosevelt was anxious for confrontation with the Japanese. Roosevelt's stationing of the Pacific Fleet at Pearl Harbor was intended to provoke them....
The moral offenses of Churchill and Roosevelt were not confined to violations of the laws of war.... Hitler wished to expel [the Jews] from Germany, and those willing to emigrate were actively encouraged to do so.... Roosevelt did virtually nothing to help.... Neither did he show much interest in efforts to settle the Jews elsewhere. Churchill, despite his frequently expressed sympathy for Jews and Zionism, was little better....
[W]as it not a clear moral imperative to avoid the outbreak of war and, if possible, to secure the evacuation of the Jews from parts of Europe likely to fall under German control? Further, once war broke out, was it not imperative to end the war as soon as possible? Churchill rejected all efforts to reach a settlement [ending World War II]. He continued the hunger blockade, a move that could only exacerbate the most extreme Nazi policies...
There have been numerous news stories in the past few weeks about corporations doing the right thing with their big tax cuts. These stories tell us how they are giving higher pay to workers and have ambitious plans for new investment. The Trump administration has been crowing over these announcements as proving the success of their tax cut. There is much less here than meets the eye.
To start, we can look at the latest and biggest announcement in this category, Apple's plan to bring back$252 billionin cash that it held overseas. Apple announced it would make a one-time $38 billion tax payment on the repatriated money.
Before anyone starts celebrating, we should be clear what bringing back this cash means. Previously, this $252 billion had been credited to Apple's foreign subsidiaries. These subsidiaries had immediate legal claim to the money, which could in fact be anywhere in the world, including the United States.
What Apple did in repatriating this money was transfer the ownership claim from its subsidiaries to the parent company. It is entirely possible that this meant simply shifting money in an account at Citigroup owned by Apple's Irish subsidiary to an account at Citigroup owned by the parent company. This means essentially nothing to the US economy.
There is the one-time tax payment of $38 billion, but this is a savings of $43 billion against Apple's tax liability under the former system, according to the Institute for Taxation and Economic Policy. So it's hard to see the cause for celebration here.
Apple did announce that it was giving a one-time bonus of $2,500, in the form of stock. If all of the company's 84,000 workers get this bonus, it is equal to a bit less than 0.5 percent of the tax liability Apple saved on its foreign profits.
Apart from this one-time windfall on foreign earnings, we don't know how much of Apple's ongoing tax savings will show up in worker's wages. As it stands, Apple is looking a bit stingy compared to other big winners from the tax cut.
Verizon announced that it would give bonuses of $1,000 to each of its 200,000 workers. This $200,000 million expenditure comes to almost 10 percent of its $2 billion-plus in annual savings from the tax cut. Similarly, Walmartannouncedpay increases that came to around $300 million annually. This would be close to 15 percent of the $2 billion that it would save annually from the tax cut.
Many of these companies are also announcing plans for expansion, which they are attributing to the incentives provided by the tax cut. While that is possible, it is also likely that many of these plans for expansion were in the works long before the tax cut was even introduced in Congress.
After all, Walmart also just announced that it was closing 63 Sam's Clubs stores. Should we attribute these closing and the resulting layoffs to the tax cut as well?
Corporate America is clearly putting on a public relations show to thank the Republicans who pushed through the tax cut. They are trying to convince people that the Republicans in Congress were doing something that was good for the country, not just rewarding big donors to their campaigns.
But this is not the sort of stuff that the public should take seriously. We know how to evaluate the tax cut. The question is whether it truly does lead to a big upturn in investment. We will find the answer in the government's data on investment, not the tall tales from corporate chieftains.
Thankfully, we shouldn't have to wait long to get the preliminary results. If the tax cut really is the huge spur to investment that the Republicans claim, it should be showing up very quickly in new orders for capital goods. The Commerce Department will release the data for December this week. While this is early, fast-moving companies surely were following the debate and were prepared to jump once passage became certain.
In late February we will have the data on capital goods orders for January. If corporate America sees the tax cut as the boon the Republicans promised, surely they will have some of their new orders in by the end of this month.
These Commerce Department reports will provide the real test of the Republican claims that the tax cuts will boost growth and provide substantial benefits for workers. Until we have these data, all the announcements of corporate generosity should be recognized as nothing more than self-serving propaganda.
One reason why the emerging research, which we summarized in ournew paper, increasingly links SNAP (food stamps) with improved health outcomes is that SNAP reduces "food insecurity" — i.e., insufficient access to enough food to live a healthy life over the course of a year.
The first time the United States tried to protect solar industry manufacturing jobs from foreign competition, things did not go exactly as planned.
Chinese solar panel makers evaded U.S. tariffs by relocating to Taiwan, andthe Chinese governmentretaliated with its own duties on U.S. exports of the raw material used in making the panels — leading American manufacturers to lay off more than 1,000 workers and scrap a new $1.2 billion factory.
Now, the United States is trying again. President Trump on Monday imposed anew round of tariffson imported solar panelsin response to fresh pleas from two bankrupt manufacturers, Suniva and SolarWorld. The companies — U.S.-based but foreign-owned—complain that Chinese rivals, backed by generous state subsidies, have flooded the U.S. market with solar panels at prices they can't match.
Economy & Business Alerts
Breaking news about economic and business issues.
For the president, the solar decision, and a similar move against imported washing machines, representa big step towardfulfillinghis campaign promisesto get tough on trading partners like China. Additional decisions loom on trade secrets, steel andaluminum, raising the prospect of a more confrontational trade stance that might cheer Trump's supporters in the industrial heartland while unnerving investors and multinational corporations.
The polysilicon industryserves as a cautionary tale of what can happen when trade officials take actions designed to protect workers in one corner of the economy only to see them boomerang elsewhere.
Production operator John White checks a panel at the SolarWorld solar panel factory in Hillsboro, Ore. (Natalie Behring/Reuters)
"There's always a risk of tit-for-tat retaliation, particularly with China. . . . It's a warning shot: Don't do this too often," says economist Douglas Irwin, author of "Clashing Over Commerce: A History of U.S. Trade Policy."
Three global firms — Wacker, REC Silicon and Hemlock Semiconductor — account for the vast majority of U.S. polysilicon production. The material is used to produce semiconductors for computers as well as the solar components that turn sunlight into electricity.
The Tennessee factory that Hemlock leveled in 2015 before it had produced anything was not the only collateral damage from the initial U.S. trade action. REC Silicon took refuge in a joint venture with a state-owned Chinese company, gaining a foothold in China but surrendering access to its proprietary technology in the bargain.
Polysilicon executives fear that the president's action will leave in place the Chinese trade barriers, which imperil their existing U.S. operations.
Industry representatives in recent weeks met with officials such asRobert E. Lighthizer, the president's chief trade negotiator, and Commerce Secretary Wilbur Ross to plead for an alternative that would resolve all solar-related disputes between the United States and China.
Polysilicon producers say that the United States should negotiate a comprehensive settlement withChinato resolve both the old and new solar issues. Such a deal could divide the estimated $1.5 billion in customs duties that importers paid in the original trade case among the panel makers, polysilicon producers and rebates importers.
Trump's tariffs could pave the way for such a negotiated bargain. Lighthizer's formal tariff announcement promised to open "discussions among interested parties" toward that goal.
Still, the idea remains a long shot. The European Union resolved a similar spat with China through talks, butObama administration efforts to settle its solar differences with Beijing at the negotiating table stalled.
Most analysts say that Trump has long been fixated on imposing tariffs as a demonstration of the muscular new course in trade policy that he is charting.
"Politicians like to say they're going to bat for a particular group of people and like to look tough," said Daniel Ikenson, trade policy analyst at the nonpartisan Cato Institute. "What's harder to see is there are costs . . . and they are real."
It may be too late to prevent further erosion in the U.S. polysilicon industry, given the dramatic expansion in Chinese production since the tariff war erupted. In 2010, the United States topped China 62,000 tons to 55,000 tons, according to Ethan Zindler, head of Americas for Bloomberg New Energy Finance. But by 2016, after a flurry of new plant construction, China produced 208,250 tons, nearly triple total U.S. production.
"There was a moment when the U.S. was the global leader. But China just basically blew by them," Zindler said. "If tariffs disappeared immediately, they would still have trouble finding customers in China."
The Chinese tariffs effectively barred U.S. suppliers from a market that accounts for 80 percent of global sales. U.S. exports of polysilicon to China plunged to less than $200 million in 2016, the most recent year available, from more than $1 billion before the tariffs were imposed, even as overall Chinese demand more than doubled.
Hemlock laid off roughly 500 workers in Michigan and Tennessee, including 100 who will leave the payroll this quarter. REC Silicon dropped 450 workers in Washington state, cut production capacity in half and mothballed a new $150 million facility.
"We're probably the victim that's been hit the hardest in this trade war," said Francine Sullivan, vice president for business development at REC Silicon.
If the Chinese tariffs remain in place, further layoffs are likely, industry officials have warned.
Wacker Polysilicon North America produces polysilicon at a $2.5 billion polysilicon plant in Charleston, Tenn., that was designed as an answer to China's surging needs, a company executive told a U.S. Trade Representative Office hearing last month. The "health" of the facility and prospects for future expansion depend upon lifting the Chinese tariffs, said Mary Beth Hudson, the Charleston site manager.
Polysilicon factories are mammoth, multibillion-dollar facilities that in scale and appearance resemble oil refineries. Inside, workers use a chemical process to convert silane gas or quartz into polysilicon. Industry jobs pay well, with total compensation often exceeding $100,000, executives say.
The dispute that reached Trump's desk saw panel makers Suniva and SolarWorld, two bankrupt foreign-owned manufacturers, face offagainst a growing U.S. workforce of solar installers, engineers, project managers and sales executives.
The International Trade Commission concluded that rising imports are hurting the domestic industry and recommended to the president potential remedies including quotas and tariffs of up to 35 percent. Tariff opponents say that more than one-third of industry's 260,000 jobs are at risk of disappearing following the president's action to discourage imports.
Suniva petitioned the government for protection in April, taking advantage of a clause in U.S. trade law that allows the president to impose sweeping global tariffs without any evidence that foreign trading partners acted unfairly. SolarWorld joined the fight for such "safeguard" measures one month later.
"More than 30 U.S. companies have been forced out of business. A strong remedy will revive and strengthen U.S. manufacturing," Timothy Brightbill, an attorney who represents SolarWorld, said before the decision.
When the United States has imposed such safeguard measures in the past, its trading partners have inevitably complained to the World Trade Organization. And the multilateral trading body's dispute settlement board has repeatedly found the specific U.S. actions in violation of Washington's international commitments.
No U.S. industry has sought safeguard protection since 2001, when the steel industry appealed for help to the Bush White House. President George W. Bush imposed tariffs of up to 30 percent, drawing applause from domestic manufacturers but leading to steep job losses at companies that used steel.
Estimates of the jobs lost ranged from 26,000 to 200,000, dwarfing the steel jobs temporarily saved. Bush lifted the tariffs in 2003 after the WTO authorized the European Union to retaliate for the improper duties with more than $2 billion in levies on U.S. imports.
