Tax reform included ample short-term benefits, but many more are on the horizon

Tax reform included ample short-term benefits, but many more are on the horizon
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Is the new tax law working? Despite what you may have read or heard, the answer is a resounding “Yes,” with the expectation that things will only get better. 

Bizarrely, some of the law’s critics seem to believe results should be instantaneous; but a tax change this momentous is a long term proposition. After all, it took more than a year for the Reagan tax cuts to work their way through the economy and produce long-term economic prosperity.

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Still, in just the first four months under the new tax regime we’ve already witnessed substantial benefits, with hundreds of companies responding to lower corporate tax rates by raising pay, expanding benefits, giving bonuses, and more. Millions of America workers have benefitted. 

 

For example, Walmart, the largest private employer in the country, announced it is raising its starting wage from $9 to $11 per hour, expanding parental leave benefits, and giving bonuses of up to $1,000. A 22 percent raise like that can have a huge impact on a family’s finances.

Critics contend these are “crumbs” and argue, in the words of Senate Minority Leader Chuck SchumerCharles (Chuck) Ellis SchumerDemocrats press Trump, GOP for funding for mail-in ballots Schumer doubles down in call for Trump to name coronavirus supply czar Trump lashes out at Schumer over call for supply czar MORE, “Corporations have been pouring billions of dollars into stock repurchasing programs, not significant wage increases or other meaningful investments.”

This recurring argument made by those looking to justify their “No” vote on the tax bill is not just a distraction meant to undermine the bill’s real benefits, it’s also wrong. Stock buybacks are good for the economy because they shift cash from stagnant companies into more dynamic ones that can use it to expand operations, increase productivity, and, ultimately, create more jobs.

We know based on years of economic research that a large part of the burden of corporate taxes falls on workers by reducing wages and opportunity. A reduction in the corporate tax rate benefits workers by increasing take home pay and creating new jobs; this is a fact that critics of tax reform tend to ignore.

What about small businesses, which mostly file through the individual rather than corporate tax code? Here is how Bank of America characterized the results of its survey of more than 1,000 small businesses on their outlook on the tax law:

“We found some of the highest levels of optimism among U.S. entrepreneurs since we began surveying them…The majority say they plan to invest tax savings back into their business and reward and hire employees.”

The term many entrepreneurs used to describe the tax law was “game-changer.”

Success for this tax strategy will ultimately be decided by economic growth and jobs. So far, the news there is all good, too. Unemployment is 3.9 percent, an 18-year low, with African-American and Hispanic unemployment at 6.6 percent and 4.8 respectively, both all-time lows. With unemployment down, the number of Americans receiving unemployment aid is at the lowest level since 1973.

A tight labor market is good for workers. According to Dan North, chief economist at Euler Hermes North America, there is now a job open for every unemployed person in the country and heftier pay raises are on the way. In some parts of the country, the labor shortage is so severe that companies are paying folks to move there.

Meanwhile, the estimates for GDP growth for this year and next are extremely encouraging. Blue Chip, the Congressional Budget Office, the Federal Open Market Committee, and the Organization for Economic Cooperation and Development have all significantly increased their GDP forecasts for 2018 and 2019, citing the tax law as the primary reason.

What the critics fail to appreciate is that workers do well when the companies they work for do well. Chairman of the White House Council of Economic Advisers Kevin Hassett sums it up nicely:

In a dynamic, competitive economy, the relationship between companies and their employees is symbiotic, not antagonistic. Research by economists Alan Krueger and Lawrence Summers, both of whom served in the Obama administration, shows that more-profitable employers pay higher wages. Any company that attempts to pay a worker less than he is worth will quickly lose that worker to a competitor. Thus, firms that want to thrive must invest in their plants and workers.

It is clear opposition to the tax plan is grounded more in politics than reality. And as the full effects of the plan kick in and Americans begin to experience higher wages, more opportunity and better jobs, the critics will look more out-of-touch than they already do.

Mary Kate Hopkins is policy manager at Americans for Prosperity, a nonprofit group dedicated to promoting limited government.