WARNING: this post is excessively long and potentially soporific.
Recently I received a private email from someone who follows my musings. They expressed concern that I was “becoming political.” Their motivation was a recent posting on Calumny. In their view it seemed as though I was choosing a “side” in the on-going “political dialogue” (which is hardly much of a dialogue). And I was choosing a side – hopefully the side of truth and the teaching of the Catholic Church on the sin of calumny. That the backdrop is the unending, crafted message about voter and election fraud, is just the case writ large that serves to help faithful people understand the moral question about what they choose to repeat or assert.
Granted we live in a world in which one’s source of “news” is a leading “tell” about which way we lean socially and politically. Even if your #1 source of news these days is ESPN, that too says something. In the days leading us to the college football national championship game, there will be all manner of assertions made about who is the better team, did one team or another deserve to be there at all, but at least come the next morning, we will definitely know who won the game. There is a final whistle. Not so with politics. Apparently not even a certified election is “whistle enough.” Post-game discussions are filled with “should of” and “what ifs” – but the game is over. The battle cry is “next year!”
What concerns me from a moral perspective is a growing lack of curiosity about our positions in life. The Catholic Church teaches that one our primary responsibilities in this life is to form our moral consciences (ref: Catechism of the Catholic Church, para 1776 and following). One way to look at the teaching is to think about how we humans make decisions. Simply (perhaps too simply) we operate out of tradition (what we’ve always done/been taugh), opinion, or conscience. But what the Church asks is to operate out of “informed conscience” – the judgment of reason in which we consider the facts and the attending moral quality of our actions we take based on those facts.
A friend of mine is concerned that any Democratic administration will attempt to “take our guns away.” That is certainly a concern rooted in an opinion. My question is “how will that happen” given Supreme Court ruling. Gun ownership as a fundamental right is a settled question as far as I can see. My concern is if their concern is rooted in some consideration of “what is” and if folks are curious enough to research around the topic apart from the echo chamber of their own news sources. All it takes is a simple query in a web browser. I entered “democratic administration outlaw guns” and got a whole host of results from both sides of the issue. The ideas and thoughts cover a range of ideas and topics I had not considered. All it took was a little curiosity, a query, and a few minutes of reading (and I stuck to the mainline sources).
Is it just a political/civil question? Is it a moral question? I think all our questions and decision are moral questions. You are stopping into a Starbucks to grab a cup of coffee. Nearby is someone asking for financial help. You are about to make a moral choice. Do you really need the coffee? But then is this a legitimate ask from the person on the street? Should we even question whether it is a legitimate ask? I didn’t say the question was easy, I said it would be moral.
Ok… so where am I going with this? I have no doubt that the Biden Administration and the Democrat “controlled” Congress will move to raise taxes. And when they do, we will hear the chorus of “there they go, the party of tax and spend – and they will just run up the national debt.” I anticipate folks will say, “President Trump and the Republicans lowered taxes and the economy soared – look at the stock market at all-time highs.” Which is a bit of a non-sequitur. Be that as it may, did the Trump administration tax and spend? Oddly no, taxes were cut, and spending continued. The national debt grew by $8 trillion ($7 trillion by other calculations). And yes, the stock market is at an all-time high.
Raising taxes, how the monies will be spent – all of it are moral decisions. Will you be curious to move beyond the slogans and assertions? I know the thought of looking into all of that is exciting beyond compare (just kidding) but it seems to me to be huge question each of us need to consider.
I was curious about the 2017 Tax Cut and Job Acts that slashed corporate taxes, offered a “tax holiday” for corporation to bringing “money home from overseas” and offered accelerated capital equipment depreciation schedules – all with the promise of increased investment in the United States economy, the addition of jobs here at home, and all manner of good things. Did it do what was promised (even before the economic ravages of the pandemic)? When we look back at it all, will it help form our moral conscience about the I-am-pretty-sure-is-coming tax increase proposal? I was curious.
2017 Tax Cut and Job Acts (TCJA) – did it do what was promised?
Before and after passage of the Tax Cuts and Jobs Act (TCJA), several prominent conservatives, including Republicans in the House and Senate, former Reagan economist Art Laffer, and members of the Trump administration, claimed that the act would either increase revenues or at least pay for itself. In principle, a tax cut could “pay for itself” if it spurred substantial economic growth—if tax revenues rose from the combination of higher wages and hours worked, greater investment returns, and larger corporate profits.
The 2017 tax cut reduced the top corporate tax rate from 35 percent to 21 percent—a 40 percent reduction. It also reduced income taxes for most Americans. Simply put, the goal was “trickle down” economics – that refers to the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term.
Did it work? Did it pay for itself?
While some TCJA supporters observe that nominal revenues were higher in fiscal year 2018 (which began Oct. 1, 2017) than in FY2017, that comparison does not address the question of the TCJA’s effects. Nominal revenues rise because of inflation and economic growth. Adjusted for inflation, total revenues fell from FY2017 to FY2018. The right question is: “What would revenues have been without the TCJA?” The most appropriate test of the revenue impact of the TCJA is to compare actual revenues in FY2018 with predicted revenues in FY2018 assuming Congress had not passed the legislation. In fact, the actual amount of revenue collected in FY2018 was significantly lower than the Congressional Budget Office’s (CBO) projection of FY2018 revenue made in January 2017—before the tax cuts were signed into law in December 2017. Still with me? That should not be too surprising. The government’s primary source of revenue is taxation and taxes were just cut. So perhaps the effects of the investment will take longer to play out?
Almost every major analysis of the legislation correctly predicted that revenues would fall in 2018 relative to a scenario without the tax cuts, with sources ranging from government entities such as the CBO and the Joint Committee on Taxation, to non-governmental think tanks such as the Urban-Brookings Tax Policy Center and the Tax Foundation, and others. They also looked at post-2018 revenues. Their predictions about their rise or fall depended on the promised boom in business investment using the real benefits of TCJA. Did that happen?
In selling the large corporate tax cut to Congress and the American public, the Trump administration claimed that corporate tax cuts would ultimately translate into higher wages for workers. According to President Trump’s Council of Economic Advisers (CEA), this process would “in the medium term boost the average U.S. household income annually in current dollars by at least $4,000, conservatively.” CEA’s “optimistic” estimate of the average household’s raise was $9,000. Then-CEA Chairman Kevin Hassett claimed that it would take “three to five years” for these massive trickle-down effects to materialize. A number of critics noted that the Trump administration’s claims were unlikely to pan out, in part because they hinged on the same supply-side economics that decades of tax cuts for the wealthy have consistently discredited.
Critics emphasized a number of flaws with the CEA’s theory of the case. First, corporations were holding large amounts of cash. Second, they were able to access capital very cheaply with interest rates at historic lows for almost a decade. Third, the effective tax rates on U.S. corporate investment, especially debt-financed investment, were already quite low, indicating that the cost of capital—let alone the portion attributable to taxes—was hardly holding back corporate investment. The critics noted that greater corporate market power meant that corporate profits consisted largely of economic rents (unearned income), not marginal returns on investment. Therefore, a new corporate tax cut would, even if effective, likely be passed onto shareholders rather than being reinvested by the firms receiving the tax cut. Critics emphasized further that even if the tax cuts sparked an investment boom that increased productivity, it would be far from clear whether workers would be able to capture the gains, given the power imbalances between U.S. workers and employers.
If effective corporate rates were cut in half, and firms had new access to $664 billion in overseas income, yet they didn’t spend that extra cash on wages or investment, where did it go? Investing in the corporation for growth? Wage and benefit increase for employees? Stock buybacks? Executive bonuses?
Some indeed went to employee wage and benefit increase. One estimate is that 9% of the total corporate benefit was spent for employee wage/benefit. However, it is estimated that more than 90% of that spending went to one-time bonuses and not permanent wage/benefit increase.
Corporate investing that would produce jobs in the United States? In the first year (2018) there was also a major benefit of being able to write off capital investment on a one-year schedule (vs. extended in time depending on the asset class). Neither 2018 or 2019 spending indicated corporations took advantage of this benefit in the production or manufacturing sectors. The two sectors that seem to garner investments were research and development as well as the service sectors (e.g. think about the great expansion of Amazon – capital intensive but generates largely service sectors job at relatively low wages)
It is estimated that almost 60% of the corporate benefit went to stock buyback programs – which benefit investors (rarely working-class folks). Harder to discern but another 15% when to stock bonus programs for corporate leaders. 4th quarter 2017 stock sales skyrocketed. Stock bonuses are a practice that’s intended to give them a greater stake in the long-term health of the company. But the SEC reported that more than half the executives sold their positions within one month.
If we knew then what we know now – was the TCJA a good moral decision? So far I would judge “no” in that is amounted to a transfer of income (taxes avoided) to businesses who did not invest so that tax revenues would rise. They simply transferred the bulk of the windfall to investors and senior executives – never making the investment. Which is what critics of TCJA predicted they would do. What the recent report from the London School of Economics (Hope and Limberg) indicates that all larger tax cuts do. Their study looked at 18 developed economies across the globe (1965-2015)
The results of the study: per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn’t, the study found. But the analysis discovered one major change: The incomes of the rich grew much faster in countries where tax rates were lowered. Instead of trickling down to the middle class, tax cuts for the rich do not accomplish much more than help the rich keep more of their riches and exacerbate income inequality, the research indicates.
The study does not include the TCJA and the Covid-19 pandemic would make inclusion in the Hope-Limberg study a bit meaningless. But we do know the TCJA tax cuts lifted the fortunes of the ultra-rich. For the first time in a century, the 400 richest American families paid lower taxes in 2018 than people in the middle class (Saez-Zucman, UC Berkeley 2019) – and there is no indication that investments are being made to lift the middle class.
Could the TCJA achieved the goal of increased tax revenues, jump starting the economy, letting all boats rise on a rising economic tide? Maybe. If the law had required re-investment, not allowed stock-buyback, or executive bonuses – that is far more complicated that one sentence.
Still reading? I suspect a lot of folks punched out on this one. It is not likely to be one of the all-time popular posts.
But I was curious. I took part of a day to query about the topic. I tried to inform my conscience about the moral quality of TCJA. And it’s not like tax rates affect me –I took a vow of poverty and by IRS regulation am exempt from taxes… but then I am “exempt” from income too. Still, this all remains a moral question to which I am compelled to consider
I think we will indeed see an increase in taxes – both personal and corporate. And there are good things to spend money on: covid vaccination programs, small business relief, unemployment insurance, and the list goes on. Our nations and the world have been rocked over the last 12+ months.
I have no doubt that the Biden Administration and the Democrat “controlled” Congress will move to raise taxes. And when they do, we will hear the chorus of “there they go, the party of tax and spend – and they will just run up the national debt.”
But will you be curious to form your conscience about the moral value of a tax increase?