Trump tax cut even worse for U.S. than once thought

The 2017 tax cut has received pretty bad press, and rightly so. Its proponents made big promises about soaring investment and wages, and also assured everyone it would pay for itself; none of that has happened.

Yet coverage actually hasn’t been negative enough. The story you mostly read runs something like this: The tax cut has caused corporations to bring some money home, but they’ve used it for stock buybacks rather than to raise wages, and the boost to growth has been modest. That doesn’t sound great, but it’s still better than the reality: No money has, in fact, been brought home, and the tax cut has probably reduced national income. Indeed, at least 90 percent of Americans will end up poorer.

First, when people say U.S. corporations have “brought money home” they’re referring to dividends that overseas subsidiaries have paid to their parent corporations. These did surge briefly as the tax law made it advantageous to transfer some assets from the books of those subsidiaries to the home companies; these transactions also showed up as a reduction in the measured stake of the parents in the subsidiaries, i.e., as negative direct investment.

But these transactions are simply rearrangements of companies’ books for tax purposes; they don’t necessarily correspond to anything real. Suppose Multinational Megacorp USA decides to have its subsidiary, Multinational Mega Ireland, transfer some assets to the home company. This will produce simultaneous and opposite movement in dividends and direct investment. But the company’s overall balance sheet — which always included the assets of MM Ireland — hasn’t changed. No real resources have been transferred; MM USA has neither gained nor lost the ability to invest here. If you want to know whether investable funds are really being transferred to the U.S., you need to look at the overall balance on financial account — or, what should be the same (and is more accurately measured), the inverse of the balance on current account.

So the tax cut induced some accounting maneuvers, but did nothing to promote capital flows to America. The tax cut did, however, have one important international effect: We’re now paying more money to foreigners.

Bear in mind that the one clear, overwhelming result of the tax cut is a big break for corporations: Federal tax receipts on corporate income have plunged.

The key point to realize is that in today’s globalized corporate system, a lot of any country’s corporate sector, our own included, is actually owned by foreigners, either directly because corporations here are foreign subsidiaries, or indirectly because foreigners own U.S. stocks. Indeed, roughly a third of U.S. corporate profits basically flow to foreign nationals — which means that a third of the tax cut flowed abroad. This probably outweighs any positive effect on GDP growth. So the tax cut probably made America poorer, not richer.

And it certainly made most Americans poorer. While two-thirds of the corporate tax cut may have gone to U.S. residents, 84 percent of stocks are held by the wealthiest 10 percent of the population.

As I said, even the mainly negative reporting doesn’t convey how bad a deal this whole thing is turning out to be.