Trump doubling down on failing tax cuts is an unwise move

Trump doubling down on failing tax cuts is an unwise move
© Greg Nash

President TrumpDonald John TrumpTrump mocks wind power: 'When the wind doesn't blow, just turn off the television' Pentagon investigator probing whether acting chief boosted former employer Boeing Trump blasts McCain, bemoans not getting 'thank you' for funeral MORE is reportedly considering giving an estimated $100 billion tax cut on the capital gains realized from the sale of assets such as stocks and bonds.

It is estimated that $63 billion would go to a select 0.1 percent or approximately 140,000 Americans out of the approximately 140,000,000 working Americans. This would equate to a $450,000 tax cut for this VIP group of earners. Does giving additional tax cuts make sense?

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The argument is that cutting taxes paid on investment gains will encourage individuals to invest more in businesses; businesses will increase investment, and this will spur businesses to increase wages as demand for employees increases.

 

Has that been the case in reality? Luckily, we have a very recent example of cutting taxes to spur increases in business investment and wages.

The promise made when the recent tax cuts were passed was that the average American would see a massive spike in wages, a minimum of $4,000 per year and up to $9,000 a year.

This was in exchange for taking on an estimated $1 trillion of additional debt. It was also promised that business investment would skyrocket. Let’s first look at the promised increase in wages.

What has happened to the wages of the average American in the first six months after passage of the tax cuts? Are Americans on track to receive the promised $4,000 to $9,000 increase in wages?

Unfortunately, not even close. During the first half of 2018, the six months following President Trump’s signing of the recent tax cuts, wages increased $0.27 per hour.

This equates to $10.80 per week assuming a 40-hour work week and $561.80 a year assuming a 40-hour work week and 52 paid weeks of work. This is a far cry from the $4,000 to $9,000 promised, and that’s the good news!

Surely at least this was far greater than the increase Americans saw in the first of 2017? Nope. During the first half of 2017, wages also increased $0.27 per hour. That’s right, wage increases in the first six months following passage of the recent tax bill were no greater than the wage increases experienced the first half of 2017.

Americans took on an estimated $1 trillion in additional debt and not only didn’t get the $4,000 to $9,000 promised wage increases but received no greater increase in wages than they did the year prior.

Now, some may say, “But they got all those $1,000 bonuses.” First, those are one-time occurrences, those aren’t wage increases. Second, they also aren’t anywhere near the promised $4,000 to $9,000.

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Source: Solutionomics using Bureau of Labor Statistics Data

Next, let’s check the promised massive increase in business investment. During the first half of 2018, the first six months following passage of the recent tax bill, on an inflation adjusted basis, business investment (including inventories) increased $71 billion, which sounds good. However, during the first half of 2017 business investment increased $80 billion, $9 billion more.

Oddly enough, even with a significant incentive to spur business investment in equipment, it was investment in equipment that saw the largest decline in the rate of increase, declining from a $51 billion increase in the first half of 2017 to a $37 billion increase in the first half of 2018.

Americans took on an estimated $1 trillion in additional debt and saw a decline in the rate of increase in business investment, not exactly the promised massive increase.

If wages didn’t increase versus the prior year and the rate of increase in business investment declined compared to the prior year, where did all the tax cut money go? Enter dividends and share buybacks.

S&P Dow Jones Indices’ analyst Howard Silverblatt estimated that dividends and share buybacks may reach $1 trillion in 2018 — a record. Apple alone has already announced $100 billion in share repurchases on top of its previously announced $210 billion repurchase program.

With respect to the estimate of second-quarter GDP growth of 4.1 percent being proof that the tax cuts are working, taking on additional debt to spur investment is not a sustainable growth policy. It's akin to racking up credit card bills to purchase goods.

Second, it was the consumer, the one who realized the paltry $10.80 per week pay raise that drove 2.69 percent of the 4.1-percent increase in GDP while business investment actually detracted 0.06 percent from second-quarter GDP growth.

So far, the recent experiment cutting taxes on investment to spur increases in business investment and wages is failing. Given this and the fact that Americans were already asked to take on an estimated $1 trillion in debt, it would be irresponsible to double down on a theory that in reality is falling short.

If the president is set on giving an additional $100 billion in personal tax cuts, at least give them to those who haven’t seen the promised wage increases, not those disproportionately benefitting from the massive increase in dividends and share buybacks, that would garner the best return on investment because it is those making less that will spend more of additional personal tax cuts driving greater and importantly, more sustainable economic growth.

Chris Macke is the founder of Solutionomics which is focused on finding solutions for a more efficient, merit-based corporate tax code, a more successful U.S. trade policy and a stable financial system. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he's a contributor to the Fed Beige Book. Find him onTwitter: @solutionomics.