Just Say No to Tax Reform 2.0!

Some in Congress are pushing for what they are calling “Tax Reform 2.0.” Americans should reply with a loud and clear “Two-point no!”

Tax Reform 2.0 would be add insult to injury, piling even more debt on Americans while the impact on wage growth of the already passed tax reform is falling well short of the promises made.

Source: Solutionomics calculations using Bureau of Labor Statistics data

Current tax policy has no connection between each company’s tax rate and its rate of wage growth. This would be a wiser tax policy. It’s common sense: The more a company increased its wages, the lower its tax rates would be.

Part of the sales pitch for Tax Reform 2.0 will undoubtedly be a claim that wage growth skyrocketed after and because of passage of the original tax reform. After listening to the 2.0 sales pitch, Americans may feel like breaking out the bubbly and buying a new car or house.

But just how much in extra wages will they have to put toward that next big purchase? To hear President Trump touting the wage growth reported in the most recent employment report, you would think it was a king’s ransom. It turns out that the actual gain was just 10 cents per hour from July to August.

It gets worse when comparing wage growth before and after passage of the most recent tax bill. Tax reform was passed the end of 2017. During the eight-month period after passage of the tax bill, from the end of 2017 to August 2018, average hourly wages grew $0.52 per hour.

During the eight-month period prior to passage of the tax bill, wages grew $0.47 per hour. So, during the eight-months after the tax bill was passed, wage growth grew only $0.05 per hour more than the eight-months prior to the tax bill being passed.

Inflation-adjusted wage growth is even worse. It is insulting to pretend that the difference in wage growth before and after the recently passed tax bill is anything other than disappointing and much less than what was promised.

Source: Solutionomics calculations using Bureau of Labor Statistics data

During the seven months after the passage of the tax bill, from the end of 2017 to July 2018, inflation-adjusted wage growth was practically zero, averaging 0.2 percent per month.

While that is a staggeringly low number, it looks even worse when one considers that inflation-adjusted wage growth for the seven months prior to passage of the tax bill was 0.6 percent.

Contrary to what was promised, inflation-adjusted wage growth went down after passage of the tax bill, not up. What happened?

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Source: Solutionomics calculations using Bureau of Labor Statistics data

The campaign to gain support for tax cuts required outlandish promises, including wage gains ranging from $4,000-$9,000. There was no way that was going to happen. The current average hourly wage of $27.16 equates to $54,320 per year. The minimum $4,000 promised would have required a 7.6-percent increase in pay.

Even if you count the recently announced $1,000 bonuses some received, that is nowhere near the minimum $4,000 promised. And to receive the $9,000 increase that the White House said was a possibility, that would require a more than 16-percent pay increase.

While a $4,000 to $9,000 wage increase was never realistic, why did inflation-adjusted wage growth decline rather than increase after passage of the tax bill?

Wages are determined by leverage between employers and employees, not tax cuts. Significant increases in corporate after-tax profits won’t increase wages if employers have all the negotiating power.

If you doubt this, consider that after-tax corporate profits ballooned after passage of the tax bill, yet wage growth barely moved relative to wage growth prior to its passage. Why? Because wage growth is a function of both what companies can pay and what they must pay.

Wage growth requires profitable companies that have the money to increase wages and employee leverage to be able to negotiate wage increases. The flaw in the aphorism that wage growth is the result of profit growth is the assumption that employees have the leverage necessary to secure wage increases.

As we are seeing right now, that is not the case. No matter how much a company’s profits increase, it won’t have to increase wages when it has the leverage. In the end, rising corporate profits without rising employee negotiating power will not raise the pace of wage growth.

While the promised $4,000-$9,000 wage increases sounded good and people wanted it to be true, reality often differs from the promises of politicians.

Ultimately, Tax Reform 2.0 will be too good to be true as well.

President Trump Right to Check Germany on Trade

President Trump hailed an agreement with European Commission President Jean-Claude Juncker in which the EU would buy more American products, work to lower tariffs on industrial goods and halt implementation of additional tariffs in the interim.

While that provides some hope, remember that the president previously hailed an agreement with China in which it would buy more American goods only to see a ratcheting up of trade rhetoric and tariffs.

Leading up to the White House visit by the top European Union official, Trump had been lashing out at the EU. Americans may be wondering why President Trump had been admonishing the European Union and, specifically, Germany over trade. After all, they are our allies.

While China gets all the press for having the largest goods trade surplus with the U.S., when looking at each country’s total global trade in goods and services, Germany edged out China in 2016 as having the largest absolute global trade surplus at a whopping $274 billion, compared to China’s $256-billion surplus.

With a GDP that is less than one-third of the size of China’s, it is clear that Germany not only has a larger trade surplus in goods and services but is benefitting far more from global trade in proportion to the size of its economy than China: Germany’s surplus represents 2.1 percent of its GDP, whereas China’s surplus represents 0.7 percent of its GDP.

How is this? While China has a much larger trade surplus in goods than Germany, China also has a significant trade deficit in services. Germany has a relatively minimal service deficit.

Why is Germany benefitting so greatly from global trade on both an absolute and percentage of GDP basis? In addition to high quality, advanced, precision products, Germany benefits from a relative currency advantage.

The euro makes German products more price competitive globally than they otherwise would be if Germany went back to using a currency solely reflecting its financial condition.

In addition, Germany benefits from favorable trade terms, including higher tariffs on auto imports from the U.S. than it faces when exporting to the U.S. Not surprisingly, with this advantage, Germany is highly dependent on global trade.

Germany’s 2016 global trade in goods and services equaling more than 84 percent of its GDP; compare this to China’s 37.1 percent. Among the largest economies examined, only Ireland and the Netherlands were more reliant on trade.

Source: OECD

How do other European members fare in the game of global trade? As impressive as Germany’s trading record and ability to benefit from global trade is, Ireland benefits even more in relation to the size of its economy.

Ireland’s $67 billion trade surplus in goods and services was equal to more than 22 percent of Ireland’s total GDP, a staggering percentage. Ireland’s status as a pharmaceutical-friendly tax haven, along with its significant exports of organic chemicals, drove its impressive trade performance.

What is going on with all the of the president’s tweets and talk about Germany auto imports? First, the U.S. is a key destination for German automobiles. Germany exported nearly 500,000 cars to the U.S. in 2017.

Second, while the U.S. places 2.5-percent tariffs on automobile imports, Germany hits the U.S. with a tariff that is quadruple that of the U.S. at 10 percent.

Germany had a $22-billion surplus with the U.S. in automotive vehicles and parts in 2017. This imbalance continued in 2018. Through the first three months of 2018, while the U.S. exported $1.48 billion in motor vehicles to Germany, Germany exported $4.55 billion to the U.S.

The automotive industry is critical to Germany employing more than 800,000 workers. It should also be noted that more of the German automobiles sold in the U.S. are made in the U.S. than imported. As a result, German automaker Daimler, owner of Mercedes Benz, employs more than 22,000 in the U.S.

While those are positives, the question remains: Why should the U.S. face 10-percent tariffs on U.S. auto imports into Germany while the U.S. only has 2.5-percent tariffs on car imports from Germany?

President Trump had good reason and was justified in seeking a better deal with at least reciprocal trade terms on behalf of the country he was elected to represent.

However, while President Trump has made it clear he is not happy with the current German trade dynamics, given the dominance of Germany in the EU and its elevated dependence on global trade, Germany isn’t going to easily give up its advantage.

In the end, while the president is right that trade terms with other countries need to be altered to create balanced trading relationships, slapping massive tariffs on imports with no transition period creating a sudden and significant change in trade policy is not the answer.

Instead, changes in trade policy need to be incremental, allowing global firms to reconfigure their supply chains, allowing for the benefits of finally achieving equal trade terms without unnecessarily and significantly disrupting company operations and economic growth in the near term.

The U.S. can both benefit from negotiating equal trade terms and avoid a significant near-term economic disruption if a measured, incremental path is taken.

 

Trump Doubling Down on Questionable Tax Cuts A Bad Move

[et_pb_section admin_label=”section”] [et_pb_row admin_label=”row”] [et_pb_column type=”4_4″] [et_pb_text admin_label=”Text”] President Trump is reportedly considering giving an estimated $100 billion tax cut on the capital gains realized from the sale of assets such as stocks and bonds.

It is estimated that $63 billion would go to a select 0.1 percent or approximately 140,000 Americans out of the approximately 140,000,000 working Americans. This would equate to a $450,000 tax cut for this VIP group of earners. Does giving additional tax cuts make sense?

The argument is that cutting taxes paid on investment gains will encourage individuals to invest more in businesses; businesses will increase investment, and this will spur businesses to increase wages as demand for employees increases.

 

Has that been the case in reality? Luckily, we have a very recent example of cutting taxes to spur increases in business investment and wages.

The promise made when the recent tax cuts were passed was that the average American would see a massive spike in wages, a minimum of $4,000 per year and up to $9,000 a year.

This was in exchange for taking on an estimated $1 trillion of additional debt. It was also promised that business investment would skyrocket. Let’s first look at the promised increase in wages.

What has happened to the wages of the average American in the first six months after passage of the tax cuts? Are Americans on track to receive the promised $4,000 to $9,000 increase in wages?

Unfortunately, not even close. During the first half of 2018, the six months following President Trump’s signing of the recent tax cuts, wages increased $0.27 per hour.

This equates to $10.80 per week assuming a 40-hour work week and $561.80 a year assuming a 40-hour work week and 52 paid weeks of work. This is a far cry from the $4,000 to $9,000 promised, and that’s the good news!

Surely at least this was far greater than the increase Americans saw in the first of 2017? Nope. During the first half of 2017, wages also increased $0.27 per hour. That’s right, wage increases in the first six months following passage of the recent tax bill were no greater than the wage increases experienced the first half of 2017.

Americans took on an estimated $1 trillion in additional debt and not only didn’t get the $4,000 to $9,000 promised wage increases but received no greater increase in wages than they did the year prior.

Now, some may say, “But they got all those $1,000 bonuses.” First, those are one-time occurrences, those aren’t wage increases. Second, they also aren’t anywhere near the promised $4,000 to $9,000.

Source: Solutionomics using Bureau of Labor Statistics Data

Next, let’s check the promised massive increase in business investment. During the first half of 2018, the first six months following passage of the recent tax bill, on an inflation adjusted basis, business investment (including inventories) increased $71 billion, which sounds good. However, during the first half of 2017 business investment increased $80 billion, $9 billion more.

Oddly enough, even with a significant incentive to spur business investment in equipment, it was investment in equipment that saw the largest decline in the rate of increase, declining from a $51 billion increase in the first half of 2017 to a $37 billion increase in the first half of 2018.

Americans took on an estimated $1 trillion in additional debt and saw a decline in the rate of increase in business investment, not exactly the promised massive increase.

If wages didn’t increase versus the prior year and the rate of increase in business investment declined compared to the prior year, where did all the tax cut money go? Enter dividends and share buybacks.

S&P Dow Jones Indices’ analyst Howard Silverblatt estimated that dividends and share buybacks may reach $1 trillion in 2018 — a record. Apple alone has already announced $100 billion in share repurchases on top of its previously announced $210 billion repurchase program.

With respect to the estimate of second-quarter GDP growth of 4.1 percent being proof that the tax cuts are working, taking on additional debt to spur investment is not a sustainable growth policy. It’s akin to racking up credit card bills to purchase goods.

Second, it was the consumer, the one who realized the paltry $10.80 per week pay raise that drove 2.69 percent of the 4.1-percent increase in GDP while business investment actually detracted 0.06 percent from second-quarter GDP growth.

So far, the recent experiment cutting taxes on investment to spur increases in business investment and wages is failing. Given this and the fact that Americans were already asked to take on an estimated $1 trillion in debt, it would be irresponsible to double down on a theory that in reality is falling short.

If the president is set on giving an additional $100 billion in personal tax cuts, at least give them to those who haven’t seen the promised wage increases, not those disproportionately benefitting from the massive increase in dividends and share buybacks, that would garner the best return on investment because it is those making less that will spend more of additional personal tax cuts driving greater and importantly, more sustainable economic growth.

 
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China and Reagan Prove Tariffs and Quotas Can Work

China’s retaliatory tariffs will provide fodder for those arguing against tariffs.  However, China’s automobile industry has proven they can be effective while former President Reagan’s quotas on Japanese vehicles proved quoatas can also work.  What is indisputable is that with a more than $375 billion goods trading deficit with China, something needs to be done.  The question isn’t whether tariffs, quotas or other measures can work, the question is how best to utilize tariffs and quotas as part of a larger plan to rectify what has obviously been a losing trade policy.

After China joined the World Trade Organization in December of 2001, the U.S. goods deficit with China increased more than four times in just 15 years.

Source:  U.S. Census Bureau

For comparison purposes, U.S. GDP increased less than two times over the same period.  With facts like these, the question isn’t whether something needs to change in U.S. trade policy with China, the question is what needs to change?

Should tariffs be part of a revised policy or are tariffs the equivalent of economic suicide as some argue?  Can tariffs work?  China’s 25% tariff on autos, Cadillac’s CT-6, the United States’ 25% tariff on light trucks, and the Toyota Corolla provide answers that discredit the idea that tariffs are always bad.

While some paint all tariffs as always being bad that is not the reality. Like most things in life including economics, the truth is usually found somewhere in the middle, not extreme positions.  Tariffs are widely utilized by countries around the globe, because they can work.  China places a 25% tariff on imported cars while the U.S. has a 2.5% tariff.   How has each country fared?  China is the number one producer of cars.   China produced more than 24 million cars in 2016, one-third of the world’s production and a 350% increase from its 2008 production levels.  The U.S.?  Production declined by more than a third from just over six million units in 1996 to just under four million units in 2016.  The U.S. now produces one-third less of what it used to produce while China now produces one-third of the world’s cars.

Still think tariffs don’t work?  In 1965 the U.S. implemented a 25% tariff on light trucks.  What happened? From 1965 to 2015, commercial vehicle production in the U.S. increased more than 450% while passenger car production declined by half during the same period.

Tariffs aren’t the only trade tool that has been proven effective.  In 1981 President Reagan instituted quotas on Japanese auto imports.  Today, Toyota, Honda and Nissan produce more than three million vehicles in the U.S. including the Toyota Corolla which is made in Mississippi. More than half of the vehicles they sell in the U.S. are produced in the U.S. with Honda producing more than 70% of the vehicles it sells in the U.S. at U.S. production facilities.

Contrast these stats with the American automaker GM.  Remember the 25% vehicle tariff imposed by China on car imports?  To avoid those tariffs and access China’s market, GM is building its Buick Envision in China while the Cadillac CT-6 is also being produced in China…and exported into the U.S.  Tariffs impact production location decisions.

Strategic tariffs and other trade tools, implemented gradually over time to allow manufacturers to reconfigure supply chains can be part of an effective trade policy.  The idea that tariffs and other trade tools are always losers is not supported by the facts.  Just ask Chinese government officials if they think they are losing or winning in the production of cars.

While there is a common argument that tariffs shouldn’t be used because they are protectionist, this is a damaging argument which contributes to our rising trade deficits, including with China.  It is damaging because it is founded on the myth that all countries want free and open trade when the reality is that all countries are protectionist, all countries place gaining a trade advantage above the purity of free trade.  Arguing against tariffs based on claims of protectionism is naïve when every other country in the world is protectionist and using tariffs, often higher than U.S. tariffs to gain a trade advantage.  It is time we stop using claims of protectionism to disqualify any changes to current trade policy when the reality is that all countries are protectionist.   The real question for U.S. trade policy is not whether trade policy needs to be changed, but how best to change it and the role various strategic trade tools including tariffs and quotas can play in improving America’s net exports of goods and services.

 

 

 

 

Why Massive Trade Deficits? Foreign Policy Drives Trade Policy

There is a much greater connection between foreign policy and trade policy than some may understand. It is not unusual for trade policy to be used in the service of foreign policy.

President Trump showed this when he tweeted: “I explained to the President of China that a trade deal with the U.S. will be far better for them if they solve the North Korean problem!”

President Trump has also stated, “If they’re helping me with North Korea, I can look at trade a little bit differently, at least for a period of time. And that’s what I’ve been doing.  And after Australia was exempted from steel and aluminum tariffs, Australia’s Minister for Trade and Investment denied any relationship between the exemption and Australia’s security agreement with the U.S., while Australia’s Foreign Affairs Minister Julie Bishop was quoted as saying, “There is no further security arrangement, there was no reciprocal arrangements as a result of the tariff exemption.”

That’s an awful lot of denials and coincidences.

President Trump is certainly not the first President to use trade policy in the service of foreign policy and this is not a Republican or Democratic issue. Both parties have subordinated American jobs to “winning” support for Capitalism. As author Alfred Eckes outlines in his book, “Opening America’s Market: Foreign Trade Policy Since 1776,” under every American president after World War II, trade agreements were used as foreign-policy tools.

While trade agreements were used to win support in the war against Communism, foreign markets largely remained closed while America threw open its doors complete with a blinking “welcome” sign that would have made even the Vegas strip blush. This was done through unequal tariffs, quotas and other trade mechanisms. These highly unfavorable trade terms put American manufacturing at a significant disadvantage. Companies responded by closing manufacturing in the U.S. and opening operations in foreign countries. Our trade policy in effect helped to push American companies out the door.

To add insult to injury, there was always the requisite but highly inauthentic Congressional show of indignation and hand wringing. But our leaders offered only crumbs to offset the loss in a self-serving manner to soften the political fallout rather than to meaningfully offset the pain inflicted on American jobs. These so-called trade adjustment provisions were, however, more for political show, political CYA than meaningful support for American manufacturing. Why have we had such a miserable trading record? One key reason is because trade policy became the tool of foreign policy, resulting in a mass exodus of companies, largely of our own doing.

More recently a new Communist power has come to the fore, China. Prior to President Trump, President Obama’s administration was negotiating the Trans Pacific Partnership, or TPP. The map below shows the countries that were to be a party to the TPP conveniently encircling China.

After analyzing the countries that were to be involved in the Trans Pacific Partnership in relation to China, it is not unreasonable to speculate to that President Obama and former Secretary of State Hillary Clinton were attempting to use the TPP at least partially to contain China’s ambitions within the Asia-Pacific region.

If you still doubt the influence of foreign policy on trade policy, then consider the following question: Have you ever been able to explain why U.S. automakers had such limited access to Japan’s auto market for years while Japanese automakers seemed to have unlimited access to our market? Or consider this: Why are our tariffs often significantly lower than the tariffs of other countries we trade with? Were our negotiators that much worse than the negotiators of other countries? No. A primary reason why our trade agreements since WWII have been so unfavorable is because U.S. Presidents from both political parties have used trade agreements as tools in foreign diplomacy.

We can debate the merits of using trade agreements to achieve foreign-policy objectives.

What cannot be debated is that it has been done. What remains to be seen is just how far President Trump and his Secretary of State Designee Mike Pompeo will go in using trade policy in the service of foreign policy.

It will be a balancing act between his foreign policy objectives and the trade promises he made to his base. Go too far in using trade policy in the advancement of foreign policy and he will erode support among that portion of his base which responded to his “America First” message.

It seems the president has a choice to make, which will be first: Foreign policy or trade policy and jobs?

Walmart, Carrier Firings Highlight Glaring Flaw of New Tax Bill

We warned Americans in a Dec. 7 piece in The Hill that the tax bill being considered and eventually passed by Congress and signed by President Trump would allow companies to fire Americans and receive massive tax cuts. Now it is happening.

Walmart announced that it would fire an estimated 9,450 employees as it closed 63 Sam’s Club stores. Remember the Indiana-based heating and air conditioning company, Carrier Corporation, that received $7 million in incentives last year? It announced 215 firings.

Surely this will impact the tax cuts they receive under the recently passed tax bill. After all, we were promised that the reduction of the corporate tax rate from 35 percent to 21 percent was about job creation. Nope.

Walmart will still see its effective tax rate reduced from its 11-year average of 32.4 percent to the new 21-percent statutory tax rate for an estimated $2.5 billion in tax savings, maybe more depending on other tax breaks it can claim.

The parent company of Carrier Corporation, United Technologies, will see its 11-year average effective tax rate reduced from 27.2 percent to the new 21-percent statutory tax rate for an estimated $455 million in tax savings, maybe more depending on other tax breaks it can claim.

Let’s tally up the score: Nearly 10,000 firings in return for nearly $3 billion in annual tax savings, nice work Congress.

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Source: USA Today, MarketWatch, Yahoo Finance, New York Daily News, Solutionomics estimates. Note: Employee firings are for Carrier and estimated tax savings are for Carrier’s parent company, United Technologies Corporation.

Under the recently passed tax bill, companies can fire Americans and receive a massive tax cut. There is no requirement for companies to hire Americans to receive a lower tax rate. Why did Congress pass such an irresponsible bill?

More than one Republican lawmaker admitted he was going to pass this bill because if he didn’t, his donors would stop writing checks. That may be a good way to stay in office, but it certainly is not a good way to make policy.

While it is true that Walmart is giving employee bonuses and raising its minimum wage, we estimate that the bonuses paid, which average $190 per employee, represent roughly 16 percent of Walmart’s estimated annual tax savings.

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Source: MarketWatch, NY Daily News, Solutionomics estimates.

Walmart is increasing its minimum wage to $11 per hour. While that is a positive, consider this: According to Payscale.com, Costo’s average hourly pay ranges from a low of $10.87 to $25.12 an hour. Walmart raised its minimum wage out of necessity, not because its received a massive tax cut.

So, what to do with this highly flawed tax bill that unconditionally gives tax cuts to all companies, even those firing Americans? It is very possible that corporate tax revenues in 2018 will be lower than expected requiring revisions to the recently passed tax bill to increase corporate tax revenue.

That would be the ideal time to make one simple but powerful change to the tax bill: Replace the unconditional tax rate reduction with a merit-based tax reduction. Companies that increasing hiring in America would see a tax rate reduction, while companies firing Americans wouldn’t.

In addition, when companies like Walmart increase their wages, they would get credit for that too, seeing a reduction in their lower tax rate. Companies already track who they are hiring and firing, know what they are paying their employees and know where their employees are located.

Implementation of these solutions would only need companies to share the information they already have. This approach would create real incentives for job creation and wage increases and ensure that the American taxpayer isn’t giving massive tax cuts to companies firing Americans. Anything less would be irresponsible.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

Apple Hiring, Bonuses Come at Heft Cost to Taxpayers

 Apple Inc. announced that it planned to hire 20,000 employees over the next five years, give $2,500 bonuses in restricted stock to its existing employees and invest $30 billion in U.S. facilities over the next five years.

President Trump promptly tweeted, “Great to see Apple follow through as a result of TAX CUTS.” Is Apple hiring 20,000 people, paying $2,500 in stock bonuses and investing $30 billion in U.S. facilities as a result of the tax cuts as the president claimed?

Here is what Tim Cook said when pressed on the question: “There’s large parts of this that are results of the tax reform, and there are large parts we would have done in any situation.”

Even if all 20,000 jobs, the bonuses and $30 billion in promised investments are due to tax cuts, is the American taxpayer getting a good return on its investment (ROI)? We first need to estimate the American taxpayer’s investment, in this case Apple’s tax savings.

Using Apple’s measurables:

The vast majority — $48 billion — of the cuts will come in the form of tax savings on its cash held overseas, while $2.3 billion will be in taxes on its domestic annual profits. That is the taxpayer’s investment.

On the taxpayer return side, we assume that all the announced jobs, bonuses and promised investment are due to the tax cuts. Looking first at the 20,000 announced jobs, we see that $50 billion in return for 20,000 jobs came at a cost to the American taxpayer of more than $2.4 million per job.

For comparison purposes, Toyota-Mazda recently announced that they would build a plant in Alabama creating 4,000 jobs in return for $350 million in incentives received from Alabama, equating to a cost of $87,500 per job. It seems Alabama taxpayers got a much better deal.

Moving on to the $2,500 bonuses, while they equate to more than $300 million in total bonuses, they are equal to less than 14 percent of Apple’s estimated annual domestic tax savings of nearly $2.3 billion.

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Source: CSI Market Monitor, Yahoo Finance, Statista, Solutionomics calculations

Apple also announced $30 billion in investments in U.S. facilities over the next five years. While that is a lot of money, how does it compare to the money Apple will be bringing back from overseas at a significantly discounted tax rate?

If Apple brings back its more than $230 billion in overseas profits to the U.S., Apple’s $30 billion in announced investments represent less than 15 percent of the cash it will be bringing back. Said another way, it will invest less than $0.15 of every $1 in overseas profits that it could bring back from overseas — not exactly a high return.

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Source: CNN Money

Last, this analysis assumes that Apple doesn’t shift future profits and operations overseas to take advantage of the fact that under the recently passed tax bill, companies will effectively pay no tax on profits earned overeas.

While they are attention-getting numbers, it turns out that Apple’s job announcements, bonuses and promised U.S. investment are not as great of a return on the American taxpayer’s estimated $50 billion investment in tax savings as they might first seem.

This naturally leads us to the following question: Couldn’t Congress have gotten a better deal for the U.S. taxpayer? Unfortunately, under the current campaign finance system dominated by big-ticket donors, the answer is no.

It turns out that the recent “tax reform” passed by the Congress and signed by President Trump as much as anything else makes the case for the reform we needed first: campaign finance reform.

Maybe a future Congress will surprise us and work as diligently on passing campaign finance reform as this Congress and the president did on passing the recently passed tax bill.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

 

Broken Tax Plan The Result of a Runaway Campaign Finance System

Republican tax reform is either a profile in courage or a reflection of the need to change an out of control campaign finance system. A CNBC poll showed that Americans want Congress and the president to focus first on items other than tax reform.

Other polls indicate that most Americans are against cutting the corporate tax rate and a majority don’t believe corporations will put the tax savings toward job creation. So why has Congress made a tax bill with two-thirds of the proposed tax cuts going to corporations their priority? It is all about finances.

What is uncertain is whether it is about the country’s finances or campaign donation finances. By process of elimination we can find the answer.

The primary argument for cutting corporate tax rates is that corporations will use tax savings to hire more people. This implies that a lack of capital is keeping corporations from hiring more people. Are corporations starved for capital?

In 2016, corporate profits after taxes were near record levels at more than $1.7 trillion, nearly 10 times the 1986 level. For perspective, during this same period, inflation increased 2.2 times.

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Source: Bureau of Economic Analysis

What about cash and liquid investments? While it varies from company to company, according to S&P Global Ratings, in 2016, the 2,000 non-financial corporations S&P tracked had corporate cash and liquid investments totaling $1.9 trillion — that’s a lot of capital. It doesn’t seem all corporations are hurting for cash.

Another argument for reducing the statutory corporate tax rate is that it will increase business investment. This too implies that corporations don’t have enough capital. If that was the case, you’d expect corporations to retain less of their profits. Yet, since 1986, undistributed corporate profits have growth significantly, totaling more than $700 billion in 2016.

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Source: Bureau of Economic Analysis

Profits are growing but corporations are retaining more of their after-tax profits. If corporations have near-record after-tax profits, yet are retaining more and more of those profits, the idea that even greater after-tax profits will increase business investment is illogical.

A third related argument for lowering the statutory corporate tax rate is that it will lead to increased wages. If companies have near-record profits and are retaining more and more of those profits, why will more after-tax profits suddenly lead to increased wages? That too is illogical.

A fourth argument for lowering the corporate tax rate from 35 percent to 21 percent is that 35 percent is onerous. If corporations paid 35 percent, that might be an argument to consider, but they don’t. It might surprise some readers to learn that the actual average tax rate paid by corporations is already less than 20 percent.

The estimated average tax rate paid by corporations in 2016 was 18.6 percent. Corporations on average have been paying 19.5 percent in taxes since 2000. That eliminates that argument.

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Solutionomics’ calculations using Bureau of Economic Analysis data

The only argument that could be made for lowering corporate tax rates is to lower the corporate tax rate for small businesses. They are the companies with more limited access to capital. Large companies with piles of cash have banks lined up down the street to lend them money.

It is the small business owner that needs more capital. Yet, currently proposed tax bills disproportionately favor large multinational corporations. How many small businesses will benefit from reducing the tax rate on foreign-earned profits to 12 percent or 5 percent? Not many.

If Congress really wanted to increase hiring, wages and business investment, they would make small businesses the priority. They would make corporate tax rates contingent on what percentage of each company’s employees were based in the U.S. This would benefit small businesses as they don’t have far flung employees across the globe.

They would make corporate tax rates contingent on each company’s percentage increase in jobs. It is easier for a small business to double its number of employees. These two simple solutions would focus on increasing after-tax capital available to small businesses, the businesses needing it most and the businesses that are the heart and soul of job creation.That shouldn’t take too much courage.

If Americans want Congress and the president to focus on other items first; the majority don’t want lower corporate tax rates; the majority don’t believe companies would use increased after-tax profits to increase hiring; and four of the primary arguments for corporate tax cuts don’t hold up when looking at the financial facts, then by process of elimination, that leaves an out-of-control campaign finance system.

It seems that rather than a profile in courage, some in Congress are focusing on their campaign finances as opposed to the finances of the country. Doubt this? Republicans have said as much. Consider these quotes:

“My donors are basically saying, ‘Get it done or don’t ever call me again,’” Rep. Chris Collins, (R-N.Y.) said.

“The financial contributions will stop,” Sen. Lindsey Graham (R-S.C.) said.

So much for courage. Maybe instead of a tax bill founded on false premises, someday Congress will have the courage to instead undertake meaningful campaign finance reform.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

The Wolf of Wall Street Could Bridge The Tax Bill’s Partisan Divide

The Senate passed its tax bill with no Democratic support. This should not be surprising considering that tax reform previously devolved into shouting matches between Republicans and Senators, including between Senators Orin Hatch (R-Utah) and Sherrod Brown (D-Ohio).

It is emblematic of the yawning divide between Republican and Democratic views of the likely economic outcomes resulting from significantly cutting corporate tax rates. Republicans exude optimism when talking about the likely impact of tax cuts on employment and wage growth. A white paper from the president’s Council of Economic Advisers forecasts a $4,000 increase in wages for the average family.

Republican optimism is matched by Democratic skepticism and cynicism. Democrats remain doubtful that promised employment and wage growth will materialize and remain cynical that the proposed bills are little more than a giveaway to corporations and the wealthy.

While this divide may seem insurmountable, leaving Americans with only the possibility of a highly partisan tax bill, there is a way to possibly achieve a bipartisan tax bill. It involves taking a page from the world of Wall Street mergers and acquisitions.

It is not uncommon for sellers and buyers of companies to disagree on the sale price. This results from sellers basing their price on more optimistic profit projections than buyers. This is similar to the divide between Republicans and Democrats surrounding the likely economic impact of proposed tax cuts.

Republicans have optimistic employment and wage growth projections, while Democrats have a far more pessimistic view.  Much like a stalemate between company sellers and buyers, this left Republicans and Democrats at an impasse with Republicans choosing to break the impasse through partisan tax reform.

This is not good for the country or the economy. First, it has increased partisan rancor and further divided Republicans and Democrats. This is on top of the ill effects resulting from the Democrats passage of the partisan Affordable Care Act (ACA).

Just as Republicans nearly repealed the ACA, it is likely that if Republican tax reform is passed, Democrats will promise to repeal it if given majorities in both chambers of Congress in 2018.

Whether or not they are able to repeal Republican tax reform, the ongoing possibility of repeal could have a damaging impact on employment and wage growth as companies may temper their actions in the face of tax policy uncertainty.

Partisan legislation is unhealthy for the country, subjecting it and companies to an uncertain policy environment, an environment that is not conducive to economic growth.

Now let’s imagine we bring in a Wall Street dealmaker to achieve bipartisan tax reform. What would they do? One means used when there is a gap between seller profit projections and buyer projections is a concept called an earn out.

In an earn out, the seller and buyer agree to a purchase price and further agree that if future company profits are greater than a certain level, the seller will earn additional money from the buyer. This allows the seller to earn a higher sale price if future profits are greater while ensuring the buyer doesn’t pay for promised future profits that never materialize.

This is a performance-based approach that bridges the gap between seller optimism and buyer pessimism. It ends the speculation and debate regarding future performance replacing it with performance based purchase price. Something similar could be implemented in current tax bills.

Instead of continuing to argue over what the economic effects of tax cuts will be, corporate tax cuts could be tied to future employment and wage growth. This would allow Republicans to try and stimulate employment and wage growth through corporate tax cuts while also addressing Democratic concerns by limiting tax cuts only to companies increasing American employment and wages.

The American taxpayer is being asked to take on an additional $1.5 trillion in debt over the next 10 years, yet there are no guarantees of increased American employment and wage growth, only promises creating asymmetric risk.

The Wolf of Wall Street would never agree to such a one-sided deal. Instead, he would require performance based corporate tax cuts. Anything else would be a wolf in sheep’s clothing.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

Senate to Companies: Fire Americans, Get A Tax Cut – A Big One

Fire Americans, get a tax cut. Lower wages, get a tax cut. Reduce investment, get a tax cut. Move jobs overseas, get a tax cut.

Under the recently passed Senate tax bill, companies can fire Americans, lower wages, reduce investment, send more jobs overseas and their statutory tax rate will be cut nearly in half, from 35 percent to 20 percent.

Even crazier, companies can bring their trillions of dollars of foreign earned profits to the U.S., fire Americans, pay lower wages, reduce investment, increase foreign outsourcing and have the tax rate on those foreign earned profits reduced from 35 percent to 12 percent or less.

When asked directly if he would place requirements on repatriated foreign profits, Gary Cohn, director of the National Economic Council said he would not. No wonder so many Americans are against this form of tax reform.

Increased hiring, increased wages, increased investment and reduced outsourcing were key justifications for the Senate’s recently passed bill that will load up Americans with additional debt; yet there are no requirements for a company to receive the tax cuts. What gives?

The No. 1 thing the American people need to know is that neither the Senate nor the House tax bills require companies to increase American hiring, wages, investment or reduce foreign outsourcing to receive a tax cut.

If the justification for adding more than a trillion dollars to the U.S. debt over a decade is more jobs and better wages, then it is simple: no job growth, no wage growth, no tax cuts.

How can we execute that? Simple: “Score” each company on three components to determine each company’s tax rate:

Component 1: Rather than cutting the corporate tax rate and hoping corporations increase hiring, base each company’s tax rate on its rate of job creation. Companies that increase hiring would pay a lower tax rate, while companies that don’t won’t: no jobs, no tax cut.

This would create a real incentive to hire. If a company knows it will get a tax cut whether it hires more Americans or not, where is the incentive to hire?

It would also generate a greater return for each tax-cut dollar, as tax rates would only be cut when jobs are created. Finally, it would increase the tax cuts available for companies creating jobs, as tax cuts would no longer be siphoned off by companies reducing employment in America.

Component 2: Tie each company’s tax rate to its wage levels. Companies that pay higher wages relative to industry peers would pay a lower tax rate. That would create a wage race to the top as opposed to today’s race to the bottom. That would increase consumer purchasing power enabling greater consumption, which comprises 70 percent of GDP. Additionally, higher wages could reduce demands on welfare programs.

Component 3: Have companies maintaining a higher percentage of their employees in the U.S. pay a lower tax rate, while companies disproportionately reducing their American workforce pay a higher rate. This would most benefit small businesses, because small businesses would generally be expected to have a higher percentage of their workforce based in the U.S. Company offshoring decisions would also be impacted.

Companies already track who they are hiring and firing; they know what they are paying their employees; and they know where their employees are located. Implementation of these solutions would only need companies to share the information they already have.

Washington loves to score everything, except, it seems, individual company job creation and wage growth. In my trips to D.C., it became apparent that the concept of scoring individual company job and wage growth was a foreign concept.

One congressional staffer told me, “That just isn’t how members of Congress think.” This is odd considering that the whole justification for the expected increase in our national debt related to the tax cuts is job and wage growth.

The famed business consultant said it best, “If you can’t measure it, you can’t manage it.” Yet, we are trying to manage employment and wage growth through tax policy without measuring company employment and wage growth.

The recently passed Senate tax bill is sending a very clear message to companies: Fire Americans, get a tax cut. It’s time Americans sent a message to the Senate: “No jobs, No tax cuts.” They can start with the Twitter hashtag: #nojobsnotaxcuts.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com