By Sheldon Kimber
In my previous post, I addressed how, in the past, our nation has been defined by the extraordinary investments undertaken in the face of crisis. I also talked about the misguided focus on the outcomes of taxes in the debate on the President’s jobs plan. As misguided as I believe that debate to be, it is part of the public dialogue, so I want to give you my point of view on whether or not we can afford to place a higher tax burden on US corporations to solve the climate crisis.
Shocker…“Trickle Down” Doesn’t Work.
The 2017 Trump tax cut reduced corporate taxes to 21%, a level not seen since 1939. In the chart below, you can see that US corporate taxes have been between 35%-50% from 1939 until Trump lowered them. Much of those taxes were spent on extraordinary economy-wide investments, including World War II, the US highway system, the Cold War, and the Space Race, to name a few.
During that period, while corporate taxes were approximately double what they are today, US GDP grew by an annual average of 3.18% from $93 billion to $20 trillion, corporate profits grew from just over $8 billion to $2.25 trillion annually, and US per capita income grew from $710.82 to $61,196.67.
It is worth noting that the government investments these taxes funded gave us GPS, the Internet, transistors and modern microprocessors, aviation advances, nuclear power – basically everything that underpins the success of most modern corporations.
For much of the 20th century US corporations dominated the world economy, thriving both in spite of and because of higher corporate taxes and the government investment they facilitated.
But what if all that money had gone to corporations instead, for them to invest? That was the stated intention of the Trump tax cuts. The key question was, and still is, will such tax breaks contribute more to economic growth than they would have if the government had collected those dollars and invested them as we have historically done? If we wish to awkwardly evaluate the price of a transformative investment in our country against the lens of taxes, then private investment is where we must start.
The Trump tax cuts cost $1.5 Trillion in foregone revenue for the US Government, and the Trump Administration, who held the most aggressive view of the potential economic returns on such foregone revenue, estimated that it would create $1.8 Trillion in increased tax revenue from increased economic growth. In theory, the government’s “investment” in forgone taxes would be paid back in full via GDP growth, increased wages, and private investment by the companies receiving the tax cuts.
The last good data we have for 2019 (pre-COVID) tells a different story. While wages appear to have increased as the labor market tightened, GDP growth, which increased slightly in 2018, fell back to pre-tax cut levels, and growth in private investment by companies fell to -2% year-over-year after having sat at almost 5% in 2016, the year prior to the tax cut. Clearly corporations did not invest the money in the next generation Internet or quantum computing.
Where Did All the Money Go?
The reductions in corporate taxes resulted in record setting corporate profits. These profits were not re-invested into new technologies or manufacturing capacity, but resulted in a historic level of share buybacks where companies used the tax savings to buy shares of their own stock, increasing their stock price (and along with it many executive bonuses). As the chart below shows, share buybacks spiked by more than 50% in the two years following the Trump tax cut.
These buybacks and the corresponding increase in equity valuations were disproportionately good for those Americans who own financial assets like stocks. Let’s say, generously, that we’re talking about the upper middle class, but we all know that when Facebook and Amazon double and triple in value the impact for Zuckerberg and Bezos dwarfs anything that my mother’s state teacher’s pension fund or the average 401K is enjoying.
But even if you don’t care about income inequality, it’s clear that making millionaires and billionaires richer on paper and hoping this somehow convinces them to spend more than they already do, is a very poor means of pumping investment capital into the economy to spur growth in manufacturing or physical infrastructure.
Listen to the Billionaires Begging the Government to Take Their Money.
Any rational person seriously discussing the muddled, nuanced impacts of the above tax policy alongside US industrial expansion in World War II or investments in the transcontinental railroad, doesn’t need an economic model to see that these are totally different policy discussions. Further, can a reasonable person really look at the data below on taxes paid by major US corporations in 2018 and say that asking Amazon to pay a little more to fund improvements to the highway system it’s business runs on, or asking Chevron to shoulder the cost of renewable tax credits to internalize the externalities of their fossil fuels, is going to cause either company excessive harm? Can a reasonable person really say that asking them to do so would impact their investment behavior or the wages they pay after taking into account how they failed to change such behavior in response to the biggest corporate tax cut in almost 100 years?
Let’s ask the reasonable people who run these companies like the billionaire CEO of JP Morgan, Jaime Dimon, or the world’s richest man, Jeff Bezos. They both support higher taxes on corporations, tax reform to close loopholes on the wealthy, and massive government investment in solutions to the Climate Crisis. When the people with the most to lose are the one’s begging you to take their money and actually govern like the world leader that we are, you really don’t need that econometric model.