Tax Reform Probably Won’t Produce The Growth Many Say It Will

tax reform

This is Claire Fox Hofbauer, attorney and Senior Legal Editor at Thomson Reuters analysis of how so called tax reform will not produce the desired growth its advocates say it will. We’ll come back to her.

Jared Bernstein, Senior Fellow at Center on Budget, former Chief Economist & Economic Adviser to Vice President Joe Biden extrapolates on the shortcoming of this tax reform:

Economic growth is a function of two broad factors: labor force and productivity growth, the latter being how efficiently workers produce the goods and services we want and need. In the last decade, both have significantly slowed. For the labor force, that’s largely due to our aging demographics. There’s nothing the tax code can do about the growing share of retirees.

Productivity is a more plausible target, because if businesses have higher after-tax profits, they could invest in more productive equipment or worker training. But here’s the thing: We have a long, empirical record showing little to no correlation between tax changes and business investment.

Bernstein goes on to further explain how this tax reform doesn’t do anything that can’t be done by companies right now:

Note also that U.S. businesses have been highly profitable for years now — that’s one reason the stock market’s been crushing it — and the cost of investment capital (the rate of interest) is very low. If firms wanted to make more productive investments, nothing’s stopping them, and there’s no reason to think a huge rate cut, from 35% to 20%, is going to do anything other than further boost their profits and share prices. In fact, that expectation is another reason U.S. equities have been on such a tear.

Hofbauer confirms this exact thing in her tax reform analysis and tells us exactly how companies will boost their profits and share prices. This is only the illusion of economic growth which makes claims of the actual dollar benefit for individuals and families asinine. Nevertheless, this is what we’re being sold.

Tax Reform Will Deliver $4000 To Every Family?

This claim by Trump’s economists on tax reform according to Bernstein:

…. depends on a chain of many weak links: The cuts will boost investment (nope), that, in turn, will boost productivity (maybe), and faster productivity will boost middle-class wages.

That last link is particularly problematic, as important work by the Economic Policy Institute has shown a long and persistent de-coupling of productivity growth and middle-class compensation.

From 1973 to 2016, net productivity rose 73.7 percent, while the hourly pay of typical workers essentially stagnated—increasing only 12.5 percent over 43 years (after adjusting for inflation). This means that although Americans are working more productively than ever, the fruits of their labors have primarily accrued to those at the top and to corporate profits, especially in recent years.

Productivity is the key and this brings us back to Hofbauer’s analysis. Bernstein states:

Productivity is much harder as economists simply don’t know what makes this critically important variable speed up or slow down. But in the long-term, it’s a good bet that investment in physical and human capital will help. As noted, the government can’t dictate private sector actions in this space, but it can make those investments itself, through productive public infrastructure such as transportation, water systems, air travel, ports and education, starting with preschool.

Hofbauer’s analysis:

The tax bill that was just passed is only going to stimulate growth in the economy. A corporation is allowed to report higher earnings and profits based upon its expected expenses. So by cutting the corporate tax rate and by passing accelerated and bonus depreciation, the earnings and profits per share for these companies is automatically going to go up. They only have an incentive to invest in capital assets, that is, assets purchased and used for that company’s business. That isn’t hiring people. It’s not going to create jobs. It just encourages them to buy more stuff because they can expense it in a shorter amount of time. So it’s going to look like the economy is growing, but it’s really just cooking the books. It’s just accounting principles. There will be no economic benefit to these tax cuts and I’m really upset.

Hofbauer is highlighting how the investment in physical and human capital will not be there as a result of these tax cuts that Bernstein says is necessary for productivity growth. In other words, quoting ex-American Airlines CEO Robert Crandall, tax reform is a joke on the middle class.



KTB Editors

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