Cutting taxes will not lead to a boon
Past cuts in corporate rates did not create economic prosperity
In President Trump’s recent speech in Missouri to promote the GOP tax plan, he resurrected the claim that the average household will get a tax cut of $4,000, measured conservatively. Tax plan architects have also claimed that prior cuts in corporate tax rates have led to robust economic growth. This “alternative fact” universe must be leavened with a big dose of reality:
Since World War II, productivity and wage growth have been significantly greater in periods with higher corporate tax rates.
The Institute of Policy Studies (IPS) has studied what has happened after major tax cuts in the past. Business investment was virtually flat as a share of GDP after the 1981 tax cuts. A steep corporate tax cut in 1986 did nothing to reverse the widening fissure between typical workers’ pay and productivity growth. Following the June 2001 Bush II tax cuts, business investment fell from 13.8 percent in the month the bill passed to under 12 percent three years later. In 1993, the Congress raised the top marginal tax rate to 39.6 percent from 35 percent on high-income earners. Business investment grew from 11.6 percent to 13 percent three years later.
IPS also looked at the records of profitable large corporations that paid a tax rate of 20 percent or less from 2008 to 2015. Those businesses were actually net losers of jobs.
In a recent survey of business leaders that asked how they would invest taxcut savings, capital expenditures ranked fourth, while buying back stock and increasing shareholder dividends were the top two choices.
Federal revenues from corporate taxes have plummeted from 3.7 percent of GDP in the late 1960s to 1.5 percent in recent years.
A smaller government means fewer people who deliver public services, and there are fewer jobs for those who maintain those services. Reduced domestic spending due to tax cuts helps to explain why such cuts reduce job creation. Economists have long been pointing out that a billion dollars spent on education and health care produces substantially more jobs than a billion dollars put in the Pentagon budget. A major increase in the Pentagon budget for fiscal 2018, coupled with a sharp cut in the corporate tax rate, is a bad combination.
As for President Trump’s claim of a windfall for the average household, Congress’s Joint Committee on Taxation (JCT) says only 44 percent of tax filers will see their tax bills reduced by more than $500. Census Bureau data shows that in 2016, 60 percent of U.S. households earned less than $75,000; the JCT finds that by 2027, only 5 percent of these households will see a tax savings of more than $500.