The Tax Bill: Bad Policy, But Good Politics?

Good policy and good politics don’t coincide neatly; legislators sell their preferred policy measures with a rosy narrative. But the disjuncture between good policy and good politics has grown dangerously large in the contemporary U.S. The result is a virtual absence of real policy debate about the most serious challenges confronting the country: health care, education, immigration, infrastructure.

The recent Republican tax bill seems to be a case of BOTH bad policy and bad politics.

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It is certainly the former. But is it also a case of bad politics? In fact, the tax bill may have the effect of reinforcing the divide between good policy and effective politics as the public becomes more accepting of a bill that initially faced steep opposition. Why is this so? The bill provides some short-term benefits to most taxpayers. While the bill front-loads the very modest gains that most will see, it defers the costs it imposes on ordinary taxpayers and on the nation. And voters are more likely to form perceptions in response to near-term gains than to make judgements based on long-term causal relationships.

With the first January paychecks arriving, workers are receiving slightly more take home pay. Republican politicians have orchestrated a campaign designed to broadcast the benefits of the tax bill to “ordinary” citizens. This campaign has included very public announcements of bonuses by huge corporations like Walmart and Bank of America. The bill’s proponents also will attribute any positive news about economic growth or job gains to the tax bill’s salutary effect; taxpayers likely will pay little attention to careful studies qualifying such claims, however analytically sound. While only a single piece of data, a January Marist poll in fact shows a significant upturn in public support for the bill in January.

The bonuses lauded by the legislation’s advocates reflect the ways the tax bill exacerbates rather than alleviating severe economic inequality. The New York Times reports that the tax bill will save Bank of America $2.7 billion this year; the bonuses distributed by B of A amount to $145 million – about 5% of their tax savings. Apple will save $40 billion, and is distributing bonuses amounting to $300 million, or less than 1% of their tax savings. Walmart has doled out $400 million in bonuses, and will allocate an additional $300 million to wage increases. But we need to put this in perspective by acknowledging that Walmart is spending six times as much – $4 trillion – buying back debt. The issue is not that the benefits to workers are unwelcome; the point is that it is misleading to refer to the tax bill as a working and middle class tax cut when 85% of the benefits accrue to corporations and their shareholders. Imagine a guest bringing a rich, expensive chocolate cake to a dinner party, offering the host a bite, and boxing up the cake to devour at home, while extoling his generosity for contributing such a delicious and expensive cake to the dinner. The guest would not be invited back.

As the Center on Budget and Policy Priorities shows, corporate profits as a share of the economy are at their highest level since the Great Depression, and employee compensation near its lowest. From a policy perspective, the economic problem we face is low wages, not poor corporate profits. Republicans tell a narrative that speaks to the former, while the policy itself nakedly caters to the later.

Furthermore, this account of the grossly uneven distribution of benefits does not consider the public investments and social welfare gains that could have been generated by this misallocated federal tax revenue.

Hang on, say tax bill proponents; there are very substantial wage gains ahead for workers. Defenders of the bill argue that the sharp cut in the corporate tax rate will unleash a wave of investment that will raise worker productivity; higher productivity will translate into large increases in wages. But there are grave gaps in this argument. First will corporations respond to tax cuts with investment in expansion and jobs? The evidence is mixed at best; some economists claim corporate investment will increase, while others are skeptical, and most believe any increase is likely to be modest. We might ask what is holding corporations back now, when profits have soared to record levels ($1.9 trillion in the third quarter of 2017 alone) and U.S. corporations are sitting on cash reserves totaling $1.9 trillion. Foregoing tax revenue to create an incentive for behavior that already faces few obstacles is a prime example of the Great Misallocation. As firms bring back cash from abroad in response to the tax bill’s provisions, they will most likely buy back corporate shares, engage in strategic acquisitions and will distribute dividends to shareholders.

But let’s assume there is an increase in investment. As demonstrated by the Economic Policy Institute, the link between productivity gains and wage increases has been broken for decades. From 1973 to 2016, productivity has grown six times faster than wages; put differently, it takes a 6% increase in productivity to produce 1% in wage gains. The prospect that corporate tax cuts will boost wages evaporates.

The immediate effect of the tax bill on incomes looks a lot like the distribution of benefits between corporations and workers. The Tax Policy Center has analyzed the impact, reflected in the table below.

Place in the Income Distribution

Average Income Gain for 2018

Percentage Increase

Bottom 20%

$60 0.4%

Middle 20%

$900

1.6%

95th to 99th percentile $13,500

4.1%

As the data show, proportional gains rise sharply with income. Only 17% of the tax cut benefits go to the bottom three-fifths of the U.S. income distribution, while 60% of the benefits go to the top 20%. Additionally, the income tax cuts are not permanent, even though the corporate tax cuts are.

The Republicans have brought the American people a rich chocolate cake and offered us a bite. They tell us they baked the cake just for us. The bet of Republican politicians is that by advancing the narrative that the tax bill is responsible for bonuses, wage increases and growth, they can turn this awful piece of policy into a political winner. Unfortunately for the cause of good public policy, the initial evidence hints that they may be right.

No, Government Should Not “Get out of the Way”

January 21, 2018

The midst of a U.S. government shutdown, on the threshold of the second year of a chaotic American presidency, is an appropriate moment to launch this blog. During the past year, we have seen not only chaos, but also a systematic assault on democratic norms and institutions in the U.S., and an accompanying erosion of democracy around the world. The moment demands more voices prepared to speak truth to power. That power has become far too concentrated in the contemporary United States, with increasingly harmful consequences for the vulnerable and for the commonweal.

How is it possible that in the richest nation in the world, we find ourselves continually short of funds for primary education?  Why is there an orchestrated effort to reduce support — both ideational and fiscal — for higher education, a backbone of post-World War II American economic achievement?  Why, despite the crumbling of infrastructure so vital to future economic growth, are we not stepping up investment to meet this challenge?  Why are access to health care access and outcomes – along with access to educational opportunities — so unevenly distributed across the country?

The fundamental premise of this blog is that we have sufficient national resources to generously fund education, infrastructure and other endeavors which will advance the long-term prosperity and global standing of the U.S. We do not do so because of a massive misallocation of resources – of public policy effort and funding. This Great Misallocation both reinforces and is the product of a grossly skewed distribution of wealth and the distorted politics that accompany this distribution. According to the U.S. Federal Reserve, the top 1 percent of the distribution held 38.6% of all wealth in 2016, and the next 9 percent held 38.5%. This left 22.8% in the hands of the remaining 90 percent of Americans, a lower share that at any time since before World War II.

At around the same time that we last witnessed similar levels of wealth inequality in the U.S., Karl Polanyi, the Austro-Hungarian economic historian, published The Great Transformation. Polanyi showed with brilliance and stunning depth of historical perspective that markets do not regulate themselves. Measures to govern markets enable them to function more effectively and are an organic outgrowth of the requisites of humanity. Put simply, markets can only function with good rules, and humans can only thrive when markets are tamed. Sadly, this deceptively profound insight is entirely perverted in the contemporary political discourse in the United States, in which politicians peddle the notion that government must “get out of the way” so markets can thrive. This is a pernicious simplification enabling endless abuses of consumers, the environment and the vulnerable – and, for some, justifying a government shutdown that is harmful, costly and wasteful.  As political columnist E.J. Dionne has written in the Washington Post, “The price of our collective amnesia about the moments when public action kept capitalism from flying off the rails is very high. Once a crisis is over, extreme forms of deregulation return to fashion, and our political discourse falls lazily into cheap government bashing.”

One irony of popular misperceptions about the role of government in structuring markets is that some of the richest and most powerful peddlers of the “government should get out of the way” thesis invest heavily in gaining control over government policy making. This is another crucial dimension of the Great Misallocation. In 1982, the political economist Mancur Olson released The Rise and Decline of Nations — an extension of his powerful and classic work, The Logic of Collective Action. Olson argued that over time, stable democracies acquire more extensive webs of interest associations lobbying for private goods; these associations invest resources (money and time) that could instead be used toward productive activity, and they distort policy outcomes. Recent examples of such distortions — which I will discuss in blog posts in the next few weeks — are the recent Republican tax bill and the disproportionate share of federal financial aid that is directed to for-profit education enterprises.

Inequalities of wealth and power are inevitable, a presence throughout American history; economic inequality arguably can serve positive functions, like encouraging entrepreneurship. But in the contemporary U.S., an excessive imbalance in the distribution of wealth has distorted political power and policy effort to the grave detriment of our collective welfare and national cohesion.