How will tax cut help middle class?

How many middle-class Americans here in northwest Arkansas are in favor of our most recent $1.5 trillion tax reform bill? How many people actually know what is in it? For that matter, how many of the members of Congress who voted to pass it actually know what is in it? Maybe if we were told the truth, rather than having the news media give us a little information as they learn about it, our views would be much different.

It has been interesting as bits and pieces of information about the tax deductions for corporations come to light. ATT, or NYSE symbol “T” as we know them today (The old American Telephone and Telegraph -Southwestern Bell Corp. combination) announced a $1,000 bonus for a reported 200,000 employees. No announcement followed about the executive bonuses. Several companies said they would raise their hourly pay scale to the $15 minimum wage. And, I’m sure there will be plenty of other corporate announcements as the accountants and company leadership review the affect on their bottom line.

It has been amusing to listen to congressional supporters as they loudly proclaim what the corporations will do as they view the benefits to their own operations. Maybe there will be some connection between the congressional expectations and the actual outcome of tax breaks as time progresses. The title attributed to the bill as a $1.5 trillion tax cut bill actually is what it is expected to add to the national debt. Unless there is something I missed, we are working off of estimates about the actual effect the tax cut (or reform bill) will have on the economy. So much of the effect is dependent on how the biggest corporations choose to use the “extra” money. Consider, among the options of more money for the corporations, paying extra dividends to the stockholders. That will help the major holders of the companies stock — institutions including mutual funds, investment groups, corporate executives, foundations, etc.

The middle class will see some benefit in their retirement plans, including the funds held by their investments and some who own individual shares of stock but the big winners are the very wealthy who own large blocks of stock. The majority of the benefit goes into the pockets of those generally above the cutoff for middle class America. Consider the biggest stockholder of Coca Cola is Berkshire Hathaway. This is Warren Buffet’s corporation which does not pay dividends to its stockholders, but could benefit enormously if Coca Cola paid an extra dividend or increased the dividend. Berkshire Hathaway controls slightly less than 10 percent of Coca Cola stock but as noted it is the largest single stockholder. Berkshire Hathaway might buy another company but is unlikely to start a dividend program of its own.

There is the option of buying back the stock of the company with extra profits from a lower tax rate. This can easily be a good choice for management because the fewer shares outstanding, the better the P/E ratio becomes on a per share basis. It makes the corporation’s statistics look much better and a lower P/E is attractive from an investment standpoint. It is easier to justify additional executive perks when the profit margins look better. So additional corporate perks, remodeling offices, more jet aircraft and new executive compensation plans are a possibility. It is hard to see how this will have a major impact at the lower end on the middle class level.

All the congressional supporters were touting the new factories and expansion plans that follow a tax cut and the additional jobs that are a result. This is the best option for the middle class, depending on the type jobs created and how you define the incomes of top and bottom for the middle class. If the jobs are entry-level and pay the minimum wage, they probably miss most of the middle class range. Opening more fast food restaurants and paying a $15 wage sounds good, but what will it do to the price of the food? If all the other costs go up at the same time will the minimum wage be a living wage ?

Increasing productivity per employee is the best way I know to justify a higher wage. It can be automation or a new process, or bringing out new products with a higher value added. All contribute to the people who need to see the benefit of the tax reform package because they are the ones who actually will spend the money on staple goods. This requires money going into Research and Development and the results of R & D don’t come instantly. I trust those dollars are being spent now — before the tax cut goes into effect.

Hopefully, the lower tax rates showing up in the paychecks of the employees will be adequate to stimulate the economy and give the workers a feeling of being included. Sending people on vacation to the Bahamas with the bonuses from the tax cut won’t do much for our economy. And, the national debt we are passing on to the next generation still concerns me. We need to spend much time in prayer for the future of our nation.

Count your blessings and “Have a Happy New Year.”

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Editor’s note: Leo Lynch, an award-winning columnist, is a native of Benton County and has deep roots in northwest Arkansas. He is a retired industrial engineer and former Justice of the Peace.