Updated: Aug 22, 2019
Written by Nate Thurston
I've read a few articles lately about how the "Tax Cuts and Jobs Act" of 2017 isn't having the desired effect. First, I'd ague that they have had a great effect on the economy, but let's dissect why they aren't looking as good in action as they did on paper.
The Trump tax cuts were a big win for big corporations, as well as a big win for all the small corporations that we seem to ignore. The corporate tax rate was reduced from 35% to 22.5%, equaling a reduction of roughly 33% in the tax rate owed by businesses.
Republicans branded this tax cut as a major win for America. It was going to lead to higher wages, more jobs, and the repatriation of funds and operations back to the good ole U.S. of A. Since the enactment of this law, we've seen reports of 3.9% business investment growth, but as we normally see afterwards, a revised number that sits around 3.1%. In addition to that, wages paid by companies seem to have shown little movement in the process.
To me, this logic is simple. If you want to actually see the effects that were advertised by Republican's in the passage of this law, the tax cuts have to be made permanent.
Imagine you are the owner of a business. You run on roughly an 8% net profit margin yearly (the average for a Fortune 500 company), and now you've seen a 33% reduction in your corporate tax rate. You have a few options: Raise your employees wages, Re-invest money in future innovation, or take the profit and run, among other things.
There's an issue with expecting businesses to raise their wages in response to these cuts; they are temporary. How many times have you expected your wage to go down after your company's profit margin decreased? Probably never. How many times have you expected your pay to go up if the profit margins increased? Probably always.
What the big corporations did was a mixture of those previous three options from above.
Many corporations did raise wages in response to the tax cuts. Walmart comes to mind, who raised their minimum wage to $11 an hour for all employees. Although there were in fact thousands of companies who raised their wages, the bulk of the increased compensation came from bonuses paid to employees.
Why would a business opt for a bonus, instead of a raise in their employee's wages?
Simple. Yes they have the money for the increased wages now, but they know the tax cuts aren't going to last, and we all know that employees aren't going to be okay with a reduction in their wages when future President Kamala Harris raises the corporate tax rate to 70%. Therefore, they give out a bonus, en lieu of a pay raise.
In addition to the missed increase in wages, we've also seen less "repatriation" and less increases in business investment.
Why wouldn't the corporations opt for more repatriation and more investment?
Once again, the answer is simple. Contrary to popular opinion, people who run businesses are pretty smart. They hear the rhetoric spewed by Alexandria Ocasio-Cortez, Bernie Sanders, Elizabeth Warren, Etc.
It takes years to open a new facility, repatriate money, move plants, or any of the things people are waiting for them to do. If your time horizon is more than five years, would you trust that the business climate will be the same in five years as it is right now? No
If you want these corporations to actually make investments in the U.S., to actually raise wages, or actually move their offshore accounts back to Bank of America, then you need to make the tax cuts permanent. Bottom Line.