That Blue Line on the chart is FRED’s report of gross domestic income, in terms of compensation for employees (wages and salaries) from 1980 to the present. One of the things to notice is that it keeps rising. We can explain part of this by taking inflation into account, and some of the bumps and blips by noting that the shaded gray sections represent recessions. But, it just keeps going up except for the Great Recession brought to us in the wake of the Housing Bubble/Wall Street Casino Crash, compliments of the Wall Street Casino.
Indeed, notice that increase in employees wages and salaries between 1990 and 2000, when the top marginal tax rate increased from 31% to 39.6%, the blue line keeps going upward. If nothing else, the graphic above illustrates that anyone trying to convince us that increases or decreases in the top marginal rate for income tax payers correlate to increases or decreases in wage and salary compensation trends hasn’t been paying attention.
The Corporate Tax Wrinkle
Okay, if one can’t make the case that tax cuts for the wealthy won’t “increase” the money in the pockets of middle income Americans, then there’s the Corporate Tax Wrinkle. Thus, the White House is trying this line:
“The Council of Economic Advisers report argues that high corporate taxes hurt workers in the form of smaller paychecks and that worker incomes rise sharply when corporate rates fall. It points to “the deteriorating relationship between wages of American workers and U.S. corporate profits” and says, essentially, that high corporate taxes have encouraged companies to shift capital abroad rather than flow profits to workers through pay increases.”
Here’s the first problem — this statement assumes that high corporate taxes cause companies to “shift capital abroad.” This conveniently ignores some other reasons corporations seek to invest overseas. Let’s make a quick list: (1) There’s good old fashioned market seeking. In this case the company is looking for new customers for its goods or services, and it may be that the domestic market is fairly well saturated so looking abroad makes perfect sense. This is especially true for technology firms which often find that the smallest market needed to drive development is larger than some of the largest national markets. (2) Resource seeking. Labor costs may be cheaper in another foreign market, or there may be quicker access to natural resources in a foreign location. (3) Strategy. Imagine that a corporation is looking to improve its distribution network, or to take advantage of new technologies; a company might decide to partner with a foreign corporation which specializes in some specific phase of production. And then there are (4) Efficiency elements. We can insert some common elements into this category like trade agreements which give an advantage to plant or service locations because of tariff agreements, or there could be currency exchange rate considerations involved.
Therefore, we can quickly see that the corporate tax environment is a part of the decision making process about shifting capital overseas, but it certainly isn’t the only factor, and it may not even be the most important one. What the White House Wrinkle demands is that we believe if Congress reduces corporate taxes this will offset all the other other reasons a corporation may want to shift some of its operations overseas. Frankly, this really isn’t rational.
And, then there’s the second problem — hoarding.
“The cash held overseas by US firms has continued to grow at a rapid pace, rising to almost $2.5tn in 2015. The substantial tax bill most firms would face if they attempted to bring this cash home, however, means that it is still very unlikely to ever be repatriated under the current system.”
Gee, if we could “repatriate” all this money imagine the increase in wages! Not. So. Fast. The firms stashing the most cash overseas are Apple, Microsoft, Cisco, Alphabet (Google), and Oracle. [MW] Right off the bat we notice that these are all tech firms, and as mentioned above tech firms are constantly market and resource seeking — while a repatriation scheme may bring some of the cash home, there’s still a reason the firms may want to keep capital available for foreign operations; it wouldn’t matter what domestic tax system was in place.
Another point that should be made more often is that this money isn’t “trapped” overseas. Where are these “deferred profits?”
“A 2010 survey of 27 large U.S. multinationals found nearly half of their “overseas” tax-deferred profits were invested in U.S. assets, including U.S. dollars deposited in U.S. banks or invested in U.S. Treasury bonds or other U.S. government securities, securities and bonds issued by U.S. corporations, and U.S. mutual funds and stocks.”
What’s “trapped” are the tax payments due on the funds — not the funds themselves, 50% of which are already happily running along in the corporate revenue streams or “reinvested” in U.S. assets. And if we could “bring home” (or get out of the bank) the other half would this mean higher wages? Remember, we tried this once before:
“In 2004, lawmakers allowed multinationals to repatriate more than $300 billion in profits at a greatly reduced tax rate. But independent studies largely conclude that firms used those profits to pay cash to shareholders, not to invest or create U.S. jobs. In fact, many firms laid off large numbers of U.S. workers even while reaping multi-billion-dollar tax cuts. Today, offshore profits are concentrated in a few large multinationals that have recently made record cash payouts to shareholders by buying back stock, showing that they already have enough cash on hand to make whatever investments they project would be profitable. Repatriated profits would likely similarly be paid out to shareholders, not invested.”
Who are those “buyback monsters” who’ve been demonstrating they already have enough cash on hand to make any investments they think might create even more profits? Apple is one, then there’s Exxon Mobil, IBM, General Electric, Pfizer, and McDonald’s. [CNBC] If Apple is one of the ‘monsters,’ then why would anyone believe that allowing the tech giant to “repatriate” more money at reduced tax rates would make them do anything other than what they’ve been doing — using the capital to buyback stock? McDonald’s? If they have enough cash on hand to indulge in financial engineering to increase their stock prices, what would make anyone believe they’d change midstream and start advocating for raising the minimum wage?
It’s really hard to imagine where that $4,000 pay raise is supposed to come from if corporations are given more tax breaks. There’s a question of the provenance of that $4,000 number in the first place, and in the second place it’s a dubious estimate at best. We should also notice that the claim isn’t being framed in context; there may be some gains for employees BUT they are long term, certainly not short-term or annual gains. [FC]
“It’s important to note that any gain to workers would only come in the long term — over several years. Furthermore, most households would not see a gain as large as the “average” or mean figure, which is pulled up by very high incomes of a relative few. In 2016, the average household income was $83,143 as we’ve already noted, but the median or midpoint for household income was $59,039, meaning that half of all households received less.” [FC]
This is another version of the old story: The Sultan of Brunei walks into a room with nine members of the Little Sisters of the Poor and the average (mean) wage skyrockets. Take that $4,000 figure with a couple of boxes of Morton’s Salt.
The Bottom Line
So, what do we know? We know that there’s no direct correlation between low top marginal rates for individual filers and wage increases. We know that corporations make decisions about off shore operations for a variety of reasons, taxes being only part of the equation. We know that corporations have several options for investing cash (foreign or domestic) only one of which — seemingly the least likely — is to pay increased wages and salaries. We know that corporations use “financial engineering” to increase their stock value, or increase dividends to their shareholders. We know that even accepting the 20-25% labor liability for corporate taxation the returns to labor are long (not short or annual) term benefits of little value in terms of household budgeting; it’s NOT like having any useful amount of “cash in your pocket.”
In short, we probably know what we’ve suspected all along. The current Republican version of “tax reform” is simply a gift to corporations, extremely wealthy persons, and a nice gesture from the Haves to the Have Mores.
And for this we are to accept cuts in Medicare to the tune of $472.9 billion over the next ten years, between $1 and $1.5 trillion in cuts to Medicaid, cuts to food assistance programs, cuts to low income heating assistance programs, cuts to children’s health insurance, cuts to education, small business support, and Meals on Wheels….