It is understandable that wealthy donors want Congress to support tax cuts, but it is disingenuous to suggest the motivation for such cuts is to create jobs or stimulate growth. What is the real inspiration behind Trump’s tax plan?
Most reputable and responsible economists and tax experts agree — tax cuts do not necessarily trigger economic growth. If they did, we would not have suffered through the recent recession which followed repeated tax cuts enacted almost annually during the President George W. Bush administration. The GDP growth during Bush’s two terms in office averaged 2.0 percent — the lowest rate of growth in 40 years. Conversely, the tax increases during the Clinton years were followed by the highest rate of GDP growth since President Kennedy between 1961 and 1963, averaging 3.9 percent. This performance was greater than that of the Reagan years when “trickle-down economics” was sold as an economic stimulus. Subsequently, the chief economic advisor to President Reagan (Martin Feldstein) and his colleague at the National Bureau of Economic Research (Doug Elmendorf) acknowledged that the growth following these cuts was actually due to monetary policy, not due to the tax cuts.[i]
There is abundant evidence that corporations do not use the proceeds from tax cuts to hire workers. It is more typical that such windfalls are used to buy back corporate stock, increase bonuses and compensation for the CEOs, or declare dividends for their shareholders — none of which creates jobs. The Institute for Policy Studies looked at 92 publicly-traded corporations and found that between 2008 and 2015, the ones that were consistently profitable paid less that 20 percent of net income in federal income taxes.
In contradiction to President Trump’s and Speaker Ryan’s arguments, the study found that lower taxes did not result in job creation. In fact, these 92 companies actually experienced a 1 percent decline in hiring. The Institute’s study also looked at 258 profitable Fortune 500 companies and found their effective tax rate was 21.2 percent. In at least one year between 2008 and 2015, 100 of these companies paid no income tax at all, and eight companies paid nearly zero taxes over the entire seven-year period.
The study concluded that job creation is not tied to the tax rate.
Recent data also challenges the idea that corporate tax rates are so burdensome that American businesses have trouble competing in the world economy. According to a study commissioned by Senators Carl Levin (D-Mich.) and Tom Colburn (R-Okla.), and conducted by the Government Accountability Office in 2013, the “effective” tax rate was only 12.9 percent. This was taking into account tax credits, exemptions, and offshore tax havens. The GAO also said, “When foreign and state and local income taxes are included, the ETR [effective tax rate] for profitable filers increases to around 17 percent.”
Similar findings were highlighted in a January 2017 report by the U.S. Treasury Department which found that the effective actual tax rate ranged from a low of 10 percent for utilities to a high of 27 percent for construction and retail trade. The actual tax rates for other sectors in our economy were somewhere in between these two extremes. This suggests, of course, that the maximum 35 percent tax rate is rarely applied to corporate earnings and its effect on American business competitiveness is largely overstated.
Our corporate tax rate is not stymieing American business according to a recent Global Competitiveness Report for 2017 and 2018. The report covered 137 economies. The Global Competitive Index measures national competitiveness and it determined that the United States is one of the most competitive in the entire world, ranking second in this index. Switzerland was first, Germany, fifth, Japan, ninth, and Canada, 14th. China came in at 27th.
It appears that the Trump tax plan is attempting to solve a problem that simply doesn’t exist.
Most Americans recognize that questionable activities are going on in Washington and want their representatives to stop these obvious violations of good-government standards. Corruption that usually evolves from nepotism, conflicts of interest and self-dealing is again suspect — this time in Trump’s proposed tax plan. Until he discloses his own tax returns, it is completely irresponsible for this Congress to even consider a tax cut proposal advanced by this administration.
Multiple different press analyses suggest that the Trump family will enjoy a financial windfall of more than $1 billion if his tax cuts are enacted. Should this be attributed to nepotism? To conflicts of interest? Or, is this merely another result of self-dealing which seems to have become the acceptable norm since Nov. 8? It has been reported that the other billionaires in his cabinet will enjoy similar financial rewards. Tax relief should go to middle income earners, not to the wealthy. They need it. They need it for health care, housing, and college expenses for their children. How many young people could go to college or trade schools if the billions in tax relief went to them instead of to the Trump family and his cronies?
The Republican party has railed against deficit spending. The party expressed alarm at the size of the national debt during the entire eight years of the Obama administration. U.S. taxpayers must not fall for the exaggerated claim by the president that his tax cuts are going to lead to a growth in the GDP of 6 percent. That is not going to happen. Also, they should not be fooled by Gary Cohn’s or Steve Mnuchin’s statements that the $2 trillion to $3 trillion loss of revenue will be made up through growth in the economy. It will not. This loss in tax revenue will simply be added to the deficit that all Americans ought to be alarmed about.
These issues should be raised as part of any consideration for this massive tax cut advanced by this administration. If approved we will likely see another disastrous economic slide like we endured in 2008 and 2009.
Dave Ferrari, 73, is a lifelong Republican and a former statewide elected official, having served as the 17th Auditor for the State of Wyoming from 1990 to 1998. He was Wyoming Deputy State Auditor for 12 years and before that was Wyoming’s top budget official for Republican Gov. Stan Hathaway. He was also Director of Finance and Accounting for the Wyoming Department of Education. He was on the transition teams for three Wyoming governors, including Gov. Ed Herschler, Gov. Mike Sullivan, and Gov. Dave Freudenthal. Ferrari was a volunteer member of Gov. Freudenthal’s campaign staff, serving as Campaign Treasurer and as one of the candidate’s chief strategists. As a consultant from 1988 to 1990, the author directed a study of the reorganization of Wyoming’s government structure. Most of the study’s recommendations were implemented by the Legislature. He is the author of the non-fiction book, “Trumped Up and Dumbed Down in America,” which will be available on Amazon, Barnes & Noble, and Archway Publishing in late 2017.
[i] Martin Feldstein and Douglas W. Elmendorf, “Budget Deficits, Tax Incentives and Inflation: A Surprising Lesson From The 1983-84 Recovery,” Tax Policy and the Economy, Volume 3, 1989.