The Administration’s Investment in Social Division

We witnessed a stunning irony this past week: a rebellion against the Republican tax cut by its greatest beneficiaries. This came in the form of a stock selloff as evidence materialized that the tax cut and a budget agreement in Congress would together propel budget deficits past $1 trillion from fiscal year 2019 onwards.

Deficits of this magnitude represent a return to fiscal conditions during the 2008/9 financial crisis – except that the economy is now growing steadily rather than contracting and the spike in deficits comes on top of an accumulation of federal debt attributable to the financial crisis itself. Massive deficits were warranted in the aftermath of the financial crisis; they make no economic sense today. However, they may prove politically useful for the current administration and the Congressional majority.

In response to rising deficits of their own creation, Republicans are now primed to follow up their massively lopsided tax cuts with their well-rehearsed mantra: “we have a spending problem.”

This message is designed to lay the groundwork for cuts to social welfare spending. For anyone genuinely concerned with deficits and debt, the exclusive focus on one side of the budget ledger (spending) while ignoring the other (revenue) is entirely dishonest. Nonetheless, the catchphrase has also been deployed at the state level in places such as Kansas  and Montana.

Purveyors of this rhetorical trick turn their critical attention to growth in mandatory spending for Social Security, Medicare and such items as “food stamps” (the Supplemental Nutritional Assistance Program, or SNAP); we should fully expect an assault on these and other programs that benefit vulnerable populations.

Even before the tax cut, U.S. federal tax revenue relative to GDP was low both by historical standards and in international comparison. If 2017 tax revenue was simply equal to the average share of GDP for the past 40 years, there would have been an additional $62 billion of tax revenue. If we exclude the historically low revenue years of the financial crisis – 2009 and 2010 – the implied loss of federal revenue is $91 billion. By itself, this would pay for a full year of the Supplemental Nutritional Assistance Program, which assists about 43 million Americans living on the edge of poverty to stave off hunger.

Even more stark is the share of U.S. tax revenue in international comparison. In 2016, tax revenue from all levels of government was 26% of GDP in the U.S., versus an average of 34.3% for all 35 Organization for Economic Cooperation and Development (OECD) countries. Of these countries, the U.S. ranks 31st. Only Turkey, Ireland, Chile and Mexico raise smaller shares of revenue relative to GDP.

Why the higher tax revenue in most wealthy countries, especially European democracies? Do citizens in these countries simply enjoy paying taxes more than Americans?  Of course not. But these countries invest in social cohesion, which is why even center-right political parties, such as Germany’s Christian Democrats, have long supported sustained social welfare spending. U.S. governments do not make this investment. Instead, American society operates under the myth that social cohesion will emerge from the inclusiveness of the “American Dream.” That myth has been shattered, and American society is in desperate need of renewed investment in social cohesion.

That investment is not forthcoming. Instead, the deficits conjured by the current administration and the Republican Congress will serve as a pretext for an assault on social welfare spending. The most vulnerable will pay the price.

Worse, divisiveness has become a conscious political weapon of the current administration and congressional majority. In their hands, the U.S. government is no longer investing in the long-term future of American economy and society; it is investing in social division.

Tragic Tax Cut Discourse

img-thing.jpegIt has begun. The narrative of the Republican tax cut lifting growth and incomes – and thereby making us all better off — is perniciously weaving its way into the discourse. On January 27, the New York Times ran a lead article about the coincidence of economic growth across all major global economies. At the very outset, the article asserts that U.S. economic growth “has been propelled by government spending unleashed during the previous administration, plus a recent $1.5 trillion shot of tax cuts.” Incredibly (that’s correct, it is not credible), the Republican tax cut has boosted U.S. economic growth within weeks after taking effect.

Last week I argued that the Republicans might just win their bet that their tax cut will yield political gains, however heavily the benefits are skewed towards corporations and the wealthy, and however grave the long-term damage to the health of the U.S. economy and polity. Evidence in favor of this hypothesis is already mounting.

As an example of the narrative, the Associated Press on February 1 reported that the tax cut is “beginning to deliver bigger paychecks to workers,” citing cases of struggling middle class Americans: a managed care worker, a secretary at a public school and a couple of teachers.

The January 22 release of the International Monetary Fund’s updated World Economic Outlook feeds directly into the narrative.  The Outlook projects faster near-term U.S. economic growth, attributed substantially to the tax cut. The IMF report has been widely cited and celebrated although the forecast predicts a negative impact on growth beginning in 2022, and says nothing about consequences for wages and economic inequality other than to note that benefits are particularly focused on upper income households. Buried toward the end of the IMF’s document is the guidance that fiscal policy be shifted toward improving the quality of public health and education and protecting the vulnerable. This is precisely the opposite of what is now taking place, and these are policy directions that have become LESS likely because of the tax cut rather than more possible.

A Monmouth University poll released on January 31 offered evidence of the rising popularity of the tax cut. A month ago, just over a quarter of respondents approved of the tax bill, and nearly half disapproved. The public is now divided evenly, with 44% each approving and disapproving. The data revealed an important motive for the shift in sentiment: fewer people now expect their taxes to rise as a consequence of the tax bill.

Meanwhile, corporations have embarked on public relations campaigns to explicitly link bonuses and wage increases to the tax bill. In announcing bonuses and an increase in their minimum wage, Wells Fargo asserted that “we believe tax reform is good for our U.S. economy.” Yes, it’s nice to extol the virtues of fresh fruit while you allow an acquaintance to sample a grape as you unwrap your gourmet Harrod’s fruit basket.

The good fortune for the Republicans who gave us the tax cut is that to the extent economic growth continues and there is evidence of wage gains, it will be easy for them to credit the tax bill for the good news. Of course, deeper analyses have found evidence that some wage increases explicitly linked to the tax bill in corporate press releases have little or nothing to do with the tax cut at all, as with the Los Angeles Times report on Wells Fargo’s increase in their minimum wage to $15 per hour. Last January, operating in a tight labor market, Wells Fargo increased its minimum wage to $13.50. The company is headquartered in California, which has mandated an increase in the minimum wage to $10.50 an hour for 2017, rising to $15 per hour by 2022. It is entirely likely that the announced wage increase would have taken place without the tax bill.

In fact, eighteen states increased minimum wages effective January 1, 2018, and minimum wage movements and in some cases union bargaining efforts have had some successes in an environment of high corporate earnings. However, with the discourse of tax bill benefits firmly implanted, media accounts will by default attribute wage gains and worker bonuses to the tax bill, reinforcing the shift in public perceptions.

Ironically, corporations have not only a political incentive to announce bonuses in the immediate wake of the tax bill; they have a financial incentive as well. By announcing the bonuses in 2017, they can deduct the expense at the current 35% corporate rate rather than new rate of 21% effective in 2018. AT&T, for example, will by this means save $28 million.

The deep unfairness of the tax bill notwithstanding, citizens struggling to stretch their budgets appear to base their views of the bill on this straightforward question: “Have my taxes gone up or down”? Policy makers are responsible for safeguarding the longer-term interests of the national economy; the tragedy of tax bill discourse is the questions they are NOT asking. Instead of “How is $1.5 trillion of revenue best utilized?” or “How can we use our resources most effectively to strengthen social cohesion and the well-being of citizens?” they have asked “what is the minimum price necessary to buy popular acceptance of a vast giveaway of resources to political supporters?” Good politics, but disastrous policy.

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.


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%



95th to 99th percentile $13,500


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.