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  March 15, 2018

Economic Benefits of Tax Cuts Should Have Arrived - Where Are They?

Businesses have had plenty of time to take Trump's corporate tax cuts into account for their investment plans. However, as CEPR's Dean Baker reports, this has not happened. Instead, they spent their tax windfall on stock buybacks
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Dean Baker is senior economist at The Center for Economic and Policy Research (CEPR). He is the author of several books including, The United States Since 1980; Social Security: The Phony Crisis (with Mark Weisbrot); and The Benefits of Full Employment (with Jared Bernstein). He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio.


GREG WILPERT: It's the Real News Network. I'm Greg Wilpert coming to you from Quito, Ecuador.

The numbers on the effectiveness of President Trump's 2017 tax cut are coming in, and they aren't quite as Trump had predicted when he advocated for the tax cut last year. For example, in February almost 100 corporations announced more than $178 billion in planned stock buyback instead of capital investment. This is the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm.

Joining me to analyze the effects of Trump's tax cut is Dean Baker. Dean is senior economist at the Center for Economic and Policy Research, and is the author of the book "Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer." Welcome back, Dean.

DEAN BAKER: Thanks for having me on.

GREG WILPERT: So, you have looked into the effects of the tax cut, and last month – I just wanted to mention this number – last month the New York Times reported that in the fourth quarter of 2017, investments in factories and business equipment grew by 6.8%, which according to them was the largest or fastest grade since 2014. What did you find? And is the investment up as a result of the tax cut?

DEAN BAKER: Well, a few points. First off, the fourth quarter of last year was before the tax cuts had been passed. For the most part, I mean. It passed – I forget the exact date that Congress approved them and of course Trump signed them. That was late in December. So the tax cuts had very little direct impact on investment in 2016. Also, I had looked at that more closely at the time, because investment was up a little bit. It was not a big rise, it was up a little bit. The overwhelmingly dominant factor in that was investment in oil and drilling, and that was due to the rise in oil prices. So actually what we had seen in 2015 and 2016 was there is a plunge in world oil prices, from $100 a barrel or a bit over, down to as low as $40 or even a little less. And that led to a falloff in investment in that sector. Oil prices have since inched up, they're now around $60 a barrel. So that led to renewed investment in that sector. I don't know if Trump really wants to take credit for higher oil prices, but that was the main factor there.

But when we're actually looking post-tax cut, you know, what has happened since the tax cut was passed or was known it would be passed, we look at the data we have from January and February, and there's nothing going on there. The data on durable goods or capital goods orders, so this is what companies are ordering by way of new investment equipment, that's actually down slightly in January and February. I wouldn't make a big point of it being down. But the point is they had projected, the Trump administration had projected a huge rise in investment, and we are certainly not seeing that.

Another measure, the National Federation of Independent Business, has a monthly survey of its members that they have been doing for more than 30 years now, and they asked them, do they expect to increase capital expenditures over the next 3 to 6 months? And again, here, too, we have data, January and February, nothing. It's maybe a very, very modest uptick, but it's back to levels we saw last year, as far back as 2014.

So there's nothing in the data that we could see that shows any evidence whatsoever of this huge surgeon investment that was supposed to be a direct outcome of the tax cuts.

GREG WILPERT: I'm wondering if, and this is what some people in the Trump administration are saying, is that it might be delayed. As I mentioned in the introduction, stock buybacks are soaring, and last week Kevin Hassett, the chairman of the Council of Economic Advisers, was asked about this during a congressional hearing. And he defended the stock buybacks as follows.

KEVIN HASSETT: We have this very special one-time thing going on where there are these trillions of dollars offshore that are suddenly, they're able to bring them home, and firms are investing them, they're giving bonuses, they're putting money in the bank, and they're buying back shares and increasing dividends, and that's how capital markets work. But imagine if I own a share and then a firm buys it back and says that they gave me a dividend. They're giving me some money, and it's coming because I made an investment in their firm. Well, then, I as an investor will presumably go out and buy some other equity in some other firm. And so what that will do is that if you have a big firm like Apple, say, that has already done all the investment plans that it plans to, and doesn't need the money that it's sending home to build a new factory, then it might buy back the shares. And the people who owned Apple will go out and buy equities in firms that are doing innovative-

WILPERT: So what's your response to Hassett's claim? Do stock buybacks in the end help the economy in the long run?

BAKER: Well, what we care about is the amount of investment we see. So if we took Hassett at his word, and he's written on this, and he wrote on this before he was in the White House, he said that investment was very sensitive to tax rates. And if that were true we should expect to see some of that investment by now. So I don't particularly care if Apple does it, as he said, that's fine, they pay it back to the shareholders, and then someone else will do it. Except no one else seems to be doing it. So that's the point. I mean, we're looking at aggregate data here, so that, fine, if Apple doesn't think they have anything to do with money, whatever, that's their issue. I don't know if their shareholders will see it that way. But in any case, that's their issue. But then someone else should be doing the investing. So we should be seeing orders for plant equipment going up in the Commerce Department's data, or we should see the National Federation of Independent Businesses finding more businesses saying they expect to expand their capital purchases. And we don't see that.

So I think Kevin is being a little, Hassett's being a little misleading here.

WILPERT: So then, what would you say is the cumulative effect of stock buybacks? I mean, in terms of inequality and in terms of household incomes.

BAKER: Well, the point is we gave a lot of money to corporations, and they're giving it back to their shareholders, who are overwhelmingly the highest income people. The richest 1% own somewhere in the neighborhood of 50% of all corporate stocks, so when you give money to corporations in the form of lower taxes, you're giving it to the richest 1%. I realize pension funds hold it, so they do get some, and you have a lot of middle income people that have a 401(k), so they'll get a little bit.

But the vast majority of that tax cut is going to the very richest people in the country.

WILPERT: So, we've been looking at the effect of tax cuts on business investment, but what about personal income? Do we have any information on that, whether the take-home pay has increased as much as $4000 per family, as Trump originally predicted?

BAKER: Well, just to be clear, that $4000 per family wasn't based on the tax cut. That was based on companies investing, and that's why this is so important. That was the analysis Kevin Hassett, you just showed a moment ago. He had done research, as had some others, that said that if we have this tax cut there will be a huge uptick in investment. And the $4000 wasn't supposed to come from the tax cut, it was supposed to have come from that investment increasing productivity, which would then increase wages. And again, we should - if that's going to happen - we should be seeing some evidence of this.

So again, I'm focusing on January and February. That's only two months. But the point is companies knew - the tax cut was already, its broad outlines were already on the table back in September. So if investment is really highly responsive to tax cuts, then let's give these people credit for not being morons, people at Apple and Google and the other companies, they're going, wow, we might be looking at lower taxes come January. What would be profitable given this new lower tax rate?

So we should be seeing something by January and February, and we're seeing zero. So that $4000 is looking like quite a bit of a joke.

WILPERT: So, you also follow the business press. What has been the reaction there in terms of the effects of the Trump tax cut?

BAKER: Well, they've touted bonuses. You've had a lot of companies that have announced bonuses. AT&T announced bonuses of $1000 for most if not all of its employees. Boeing announced bonuses, Disney, a number of major companies announced bonuses. And they said, see, this is the dividend from the tax cuts. And that's good to see. I'm glad to see workers at AT&T, people who get $60,000, $70,000 a year will get a $1000 bonus, that's good. I mean, that's something.

But two points. One is that these are bonuses, these are one-time payments. They're not pay increases. We'd like to see permanent pay increases. The other is if you look at the size of the tax cut relative to the amount they're paying out in bonuses, typically the size of the annual tax cut, in other words, they'll get it this year, next year, the year after, it's going to be continuing, that's about ten times the size of the bonus. I know I looked at that in the case of AT&T, and they're looking at a tax cut on the order of $2 billion. Their bonuses were going to cost them in the neighborhood of $150 million-$200 million. This is by their own reckoning, I have no independent way to verify how much they actually pay out in thier bonuses.

So those don't look very good. They've been touted in the business press, you've got a lot of companies have gotten good public relations out of it, but the reality is when you look at it a little more closely, they don't look very good.

WILPERT: Okay. Well, we're going to have to leave it there for now. I'm speaking to Dean Baker, senior economist at the Center for Economic and Policy Research. Thanks for having joined us today, Dean.

BAKER: Thanks for having me on.

WILPERT: And I'm Greg Wilpert for the Real News Network.


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