The GOP Tax Scam AIn't Workin'

How much better would you feel if it was the Koch brothers rather than the Russians stealing the midterms? Interesting report from Pam Martens Monday about how the Kochs are staffing up with voters data scientists in time for November-- and all tax free. But what are the Republicans going to do? That tax scam of there's sure isn't winning them any votes. It's a big bust.

Yesterday Bloomberg pointed out in an editorial that it hasn't done anything for workers, just for the very rich. Instead of rising, wages have actually dropped. Noah Smith, who teaches finance at Stony Brook University: "Real average hourly compensation actually fell in the first quarter after the tax reform was passed... The tax-cut windfall being used to finance the capital expenditure that the economy needs still remains below the high set back in 2015.

Some have expressed dismay that stock buybacks seem to have taken precedence over boosting capital investment. Since the tax cuts passed, companies have been using buybacks to return record amounts of cash to shareholders-- more than $700 billion in the first two quarters. That naturally raises the possibility that companies don’t have good projects to invest in. If companies pass their tax windfall on to shareholders, those investors can choose to react by increasing consumption-- meaning more of society’s resources go to the wealthy. They can also choose to invest the money in other companies with better growth prospects-- but if those companies are also reacting by returning the money to their shareholders, rather than making capital expenditures, not much is getting accomplished.

...Huge, immediate gains for wealthy shareholders combined with tepid increases in business investment and decreases in real wages don’t paint a flattering picture of the tax cut’s impact so far. There is, however, a possibility that the tax cut has acted as a Keynesian fiscal stimulus, helping to push down unemployment.

But that’s not exactly the long-term structural improvement that the bill’s supporters advertised. And as a recent research note from the Federal Reserve Bank of San Francisco points out, fiscal stimulus in good economic times is less effective than in recessions. And growth hasn’t really sped up either-- real per capita gross domestic product growth was only 1.34 percent in the first quarter, below 2017’s pace, and considerably less than in 2014 and 2015:

This tepid rate of growth means that the tax cut is unlikely to pay for itself. By this point, almost all economists recognize that income tax cuts no longer stimulate the economy enough to reduce deficits, as supply-siders thought they would back in the 1980s. But economists still held out some hope that lowering the corporate tax, which is believed to be more harmful than the personal income tax, would have a more salutary effect on the budget. Unfortunately, that hope appears to be fading, as fiscal deficits increase rapidly.

There’s still the possibility that Trump’s tax reform will bear fruit in the long term. But early results are pointing to another possibility-- that tax cuts have run their course as an economic policy.

In the postwar period, with top marginal income tax rates at more than 90 percent, it made sense to cut taxes as a way of improving the economy’s long-term health. A series of big tax cuts, under presidents Lyndon Johnson and Ronald Reagan, might have boosted economic activity in their day. But the later tax cuts by George W. Bush were followed by years of underwhelming growth, implying that income taxes were no longer doing much damage to economic efficiency.

Corporate taxes were really the last hope for the tax-cutting strategy. But if even that doesn’t provide more than a small momentary fiscal stimulus, then we’ve reached the end of that approach’s usefulness.