Erik Nesler: Testing trickle-down economics with the new tax bill

Wednesday, January 24, 2018 - 1:10pm

The recent passing of the Tax Cuts and Jobs Act has been proclaimed as one of President Donald Trump’s greatest achievements since entering the White House last year. The bill is a major legislative win for fiscal conservatives who advocate for low taxes and minimal government spending.

Americans across the board will see a reduction in the taxes that come out of their regular paychecks, but the wealthiest citizens will reap the greatest benefits from the bill. Besides individual income tax cuts, the bill consequentially impacted the private sector with its substantial reduction in the corporate income tax rate, from 35 percent to 21 percent.

The tax cuts were touted by Republicans as the most effective way to spur economic growth in the United States. The private sector, along with wealthy Americans, are expected to invest their tax breaks, thus propelling the economy forward. Tax investments at the top then trickle down to affect the broader economy. This idea that the private sector and the wealthy have the power and scale to impact the entire economy has been touted for decades by fiscal conservatives. Former President Ronald Reagan is one of the most famous proponents of the ideology, even though the tax cuts implemented under his administration were regarded as relatively unsuccessful at promoting economic growth.

Fiscal conservatives want to believe that corporations, with the increased cash from the tax break, will increase wages, boost employment and invest more in the U.S. economy. The increase in wages and employment should put more money in the pockets of American consumers, making everybody better off through heightened consumption.

The slashing of the corporate income tax rate additionally served to incentivize businesses to continue operating domestically. Companies based in the U.S. have been relocating left and right to European countries in order to benefit from their low corporate income tax rates. Ireland, for example, boasts a 12.5 percent basic corporate tax rate, compared to 21 percent in the United States. However, relocation of jobs abroad comes at the expense of American jobs and the American economy. 

Fiscal conservatives may feel certain that the expected advantages from these tax cuts will be realized in due time, but I wonder if they will truly come to fruition. Many, including myself, fear that companies will simply distribute the increased cash to shareholders through healthy dividends. Will firms realize their potential and make the most of their tax break to help the broader economy?

There have been a couple of hopeful signs since the bill’s passing that may suggest it could be effective. For example, Walmart recently announced that it plans to use its tax break to give bonuses to current employees and raise their minimum wage to $11 per hour. Considering Walmart employs nearly 1.5 million Americans, this seemingly slight increase could have ripple effects throughout the economy. AT&T and Comcast reported that they plan to give out bonuses as well. Finally, because of a provision in the bill that incentivizes major corporations to bring offshore cash holdings back to the United States, Apple plans on bringing its overseas cash back to the U.S. in order to invest $30 billion over the next five years while creating 20,000 new jobs.

Despite these hopeful signs, many still firmly believe that shareholders, who are usually wealthy already, will reap the greatest benefits from this bill. An analyst at Gordon Haskett Research Advisors wrote, “The $300 million of incremental labor expenses in 2018 only represents about 15 percent of the potential cash windfall” that Walmart is expected to enjoy from the break. Though the minimum wage hike is a good sign, the company could be doing more. As for Apple, analysts are already expecting a large increase in share buybacks and dividends, which are unlikely to trickle through the economy.

Initially, I was in support of the bill as it represents everything that fiscal conservatives stand for. I’ve always thought of myself as socially liberal and fiscally conservative, a characterization that I know many of my peers share. But after researching the bill and reading the cynical views of its prospects, I’m not so sure anymore. I like the idea of making the U.S.’s corporate income tax rate more competitive among other industrialized nations, but I wonder whether or not everyone in the American economy, not just the wealthy, stand to be better off because of it.

If companies simply distribute the value of their tax break to shareholders, the bill has no chance of fulfilling its proponents' expectations. I believe this reduction of the corporate tax rate will be a good test as to whether or not trickle-down economics, a cornerstone of fiscal conservatism, will truly work for the American economy.

Erik Nesler can be reached at egnesler@umich.edu.