On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA). The legislation cut the corporate tax rate from 35% to 21%. In addition, the top individual tax rate was reduced to 37% and the standard deduction was doubled, while all personal exemptions were eliminated. Those in favor of the TCJA argued that the benefits received by corporations and top earners would eventually flow down to the rest of the economy and working Americans.
This concept has been coined “trickle down economics” and it has been a misnomer ever since it was first uttered. The theory is simple: cutting income taxes causes a financial windfall, creating opportunity and prosperity for those corporations and wealthy individuals receiving it, and that opportunity and prosperity will trickle down to the middle and working classes, effectively providing a benefit for all.
However, as nice as the theory sounds, it has been proven time and again that trickle down economics does not work in the real world. While tax cuts often gives the economy a temporary bump, the trickle simply does not happen. Corporations and top earners keep the tax cut benefits for themselves, and the rest of America is left holding the tax bill. This is what happened during the Reagan era as well as the Bush era, and it’s what will happen under the Trump administration.
Trickledown economics is a falsehood steeped in politics, not economics. President Trump and the Republican party have argued that the TCJA would improve circumstances for workers, namely by providing an avenue for wage growth. However, 2018 has shown wages grow at an anemic 2.6% year-over-year, representing an increase of just 0.1% from previous months. Moreover, inflation is rising and canceling out all but the most substantial wage increases (inflation for 2018 is forecasted to be between 1.9% and 2.1%).
The tax cuts have resulted in a windfall of additional money in corporate bank accounts. But companies have not been using that tax-cut money on employees. Instead, a majority of the funds have been used on stock buybacks.
A stock buyback is when a company repurchases shares of the company’s own stock at market value. 2018 has seen a record number of stock buybacks, giving the tax cut windfall to investors instead of employees.
Stock buybacks benefit the company and its shareholders in several ways. Reducing the number of outstanding shares reduces the amount of dividends the company must pay its shareholders. It also helps preserve a company’s stock price, especially when the economy becomes bearish. Moreover, when the overall economy is performing well (as it is now), stock buy backs increase a company’s stock value. Finally, stock buybacks also improve a corporation’s market metrics, as reducing outstanding shares improves its earnings per share ratio (a key metric for stock investors).
In short, stock buybacks are good for a company and its investors. What’s missing from these benefits are positive effects for workers. Most companies have not implemented or announced any major wage increases for their employees. In place of salary increases, some companies have opted to give employees a cash bonus. However, only 45 of the 500 companies that make up the S&P 500 have paid such cash bonuses. Perhaps more telling is the fact that a majority of these bonuses are one-time pay outs, while under the TCJA, the corporate tax cuts will go on indefinitely.
Most Americans believe that reducing the corporate tax rate was a good thing. However, the bait-and-switch claim that the tax cuts would primarily benefit the average working American is a laughable farce. These tax cuts are a gamble, risking an exploding federal deficit for the hope of an economy that grows faster than the national debt. Although the economy has been on a steady up-swing since 2009, even today the federal deficit is outpacing economic growth. If the deficit reaches a tipping point, a Republican-controlled Congress and Presidency will cut key social welfare programs, hitting the working class the hardest, the same working class who will never will see a trickle of the benefits from the Trump tax cuts.
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