Trumped-Up Trickle-Down: Will Lower Corp. Tax Rates Boost Growth?

President Trump promises to take us back to the top of the hill by pushing the middle class back into coal mines and allowing Wall Street to take a second shot at risky financial instruments. Photo courtesy of The Fiscal Times.

Written by Aldo Gonzalez

Let’s make something quite clear: corporations have no problem making profits right now. Corporate profits, as a percent of GDP, are the highest they have been in decades. With this in mind, when President Trump releases his tax plan and proposes cutting taxes for corporations from 35 percent to 15 percent, one must wonder which constituency he is trying to assist. As mentioned in a previous article, the philosophy at the heart of this plan is supply-side, the idea that the economy grows when businesses are relieved of high taxes. The Trump White House has decided to revive this piece of 1980s history as a way to stimulate economic growth.

Surely, Ayn Rand would be proud to see a government that steps out of the way of the subjugated businesspeople so that they may bless our economy with their innovation and ego. Nevertheless, it is fair to question whether the Trump voter in the Midwest looks at this tax cut for the wealthy as fondly as Rand would.

It is important to take note of the economic fluidity employed by the White House. President Trump seemingly lives in two different realities at once. At times, he lives in a post-apocalyptic America where economic growth has been pummeled into the ground by an overpowering regulatory state and an overbearing tax framework. When in this reality, President Trump promises to take us back to the top of the hill by pushing the middle class back into coal mines and allowing Wall Street to take a second shot at risky financial instruments.

Alternatively, President Trump travels to a different America in which the markets rocket through the roof at the sight of his golf swing in Mar-a-Lago. Within the span of his first 100 days, the President touted the market upswings quite a bit. Undoubtedly, this mixed messaging is a bit confusing.

But there is a real question to be asked here about where the administration’s priorities lie. Without question, President Trump’s tax plan will be beneficial for Wall Street and for the wealthy individuals with enough capital to employ the tools offered by the Financial District. In a certain sense, this is economic growth. Surely, the boost provided by this tax plan will enhance some economic metrics that President Trump will flaunt. However, this was not his campaign. President Trump’s campaign promised to bring an end to the elite allegiance between Wall Street and Capitol Hill. For too long Americans have been ripped off. Trump was going to change that. Of course, he then went on to nominate an amalgam of Goldman millionaires to the People’s Cabinet. But it is not until now that a solid argument against Trump’s populist messaging can be launched effectively.

Let’s address the premise of his tax plan. Trump expects a lax corporate tax to make America competitive against Ireland and other corporate tax havens. The breaks provided will improve the financial bottom line which will then translate into jobs for Americans which then morphs into “bigly” economic growth. Remember, this is the reality in which corporate profits are diminishing into oblivion. Given the fact that corporate profits are already doing rather well, why haven’t we seen the growth in jobs that lies at the core of this proposal? We also must address the question of what are corporations more likely to do with these fattened bottom lines. Will they create enough jobs to spur growth or will they allocate these profits to shareholders while pursuing initiatives that bolster their financial statements (like share buybacks or business acquisitions)?

The Roosevelt Institute, a left-leaning think tank, found that 40 percent of corporate earnings and borrowing in the 1980s was allocated to investment. The rate has been falling ever since with borrowing closely correlated with shareholder payouts. The same pattern is corroborated by FiveThirtyEight which finds that about 52 percent of business investments are shareholder payouts.

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FiveThirtyEight […] finds that about 52 percent of business investments are shareholder payouts. Source: CompuStat.

Reality is that reasons vary. Greed may be a factor when Google holds on to over half of its value in capital, but they may also be waiting to invest in the next wave of innovation. A lot of this data can be attributed to the relevance of shareholder perspectives in business management. The point is that Republicans should be ready to respond to these patterns that contradict their promise behind a corporate tax cut.

There is an interesting dynamic materializing behind the curtains. It is no secret to anyone who followed Trump’s first 100 days that the administration follows its “America First” policy in every sector. Aside from being headquartered in the United States, what makes corporations like Apple, Google, or Starbucks American? They have fought like hell to make sure they pay the least in taxes to fund the federal government. In fact, corporate taxes in 2015 composed only 11 percent of federal revenues compared to anywhere from 25 to 33 percent in the 1950s. Let’s not forget the $2 trillion companies and individuals hiding overseas. If corporations fight to avoid an American duty—paying taxes—why should the “America First” policy enhance their situation?

But here’s the kicker: economic inequality plagues the business world just as it plagues society. Not all companies are created equal. In fact, this is one of the main reasons why the plan won’t work: industries have become more concentrated over the past few decades. According to Larry Summers and The Economist, there appears to be growing monopoly power stemming from market concentration, focus on mergers and acquisitions, pure profit driven strategies, and declining business formation.

This corporate tax component of Trump’s plan will make it a whole lot harder for smaller businesses to compete with the titans. But this doesn’t seem to deter the Trump administration. Regardless, the plan faces a major uphill battle as multiple stakeholders must be aligned even within the Republican Party. If President Trump truly cares about promoting economic growth, I suggest he turns to bolstering the middle class, not wealthy Manhattanites.

 

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