The Tax Cut and the Balance of Payments (Wonkish)

"crazy, radical centrists" needs to spread, it was almost enough to make me log in to Twitter...

Every year when I get my tax prep software, I go in and see how much a married couple with no kids can earn in dividends and/or short term capital gains and pay zero tax (a tax law left over from the Bush Tax Cuts). And then I compare that to the taxes paid by a working person. (you can try this at home) This year a married couple with no kids can earn up to $102,400 of dividends and long term capital gains and pay no tax. A working couple earning $102,400 will pay a total of $16,627 in income ($8,886) Social Security ($6,274) and Medicare ($1,467) taxes. Years ago, when the maximum rate was 70%, it was the opposite, workers were preferred. The maximum rate for workers was 50% and dividends were taxed at up to 70%. We are now pumping trillions of national debt in to the stock market (with corporate tax cuts) and then making the people who benefit from that pay less in taxes (at a maximum of 23.8%) while workers pay taxes at higher rates..

An accounting system that is nothing more than a tax dodge serves no real, useful, long-term purpose. If you have no idea what's really happening in the economy, how can you really know where the gaps are and how to set policy? It's like driving blindfolded. At some point, you will collide with something you had no idea existed like 2016.

I'd think by now people would reject the notion that Republican law makers are doing you a favor by cutting taxes on "this guy over there." There's a sucker born every minute, and getting them to the polls is vital to this charade.

wonkish question: There is a theory that the tax cut would reduce $liquidity in overseas locations due to shift of $cash to the US. If this is only about accounting, and $cash balances abroad are unchanged, there is no reason to expect any liquidity squeeze?

If the intent had really been to stimulate business investment, not just to subsidize equity holders, the tax cut would have been tied to the desired behavior: investing. In the 60s, this was called a (net) investment tax credit, available to those businesses who actually increase their investment spending.

And not only does the tax cut go to stockholders, but also (I'm being a little cynical, but, I think, accurate) the money goes to better capitalize political marketing to naïve Republican consumer "citizens" who vote their feelings for populist salesmen who have no interest in public good (beyond job security); and are guaranteed to not vote for increased taxes to the super wealthy. The tax cut better secures the durability of predatory capital through patronage. A happenstantially-Democratic Senate (2021, in one's dreams) would not survive re-election, if it acted nobly to substantially tax the super wealthy. Progressive taxation needs political martyrs (secretly hiding their devotion, before election). A tax increase on the super wealthy isn't going to happen. But the ballooning National Debt transfers ownership of U.S. fiscal health to foreign creditors. And China loves that, Donald. Finally, predatory capital goes to the beach, noting (in effect) that it's not wealth's problem.

I expanded Mr Krugman's good words to focus on those with nothing to lose and believed in Trump Claus: Higher stock prices actually made poor-to-middlin' Americans poorer - relative to those owning significant stock assets - who can now buy more property & assets (driving-up tomorrow's buy-in costs) and who can now access more credit (driving rates & overall inflation). Working 2 or 3 part-time jobs instead of 1 or 2 part-time jobs is NOT prosperity. Republicans are against raising minimum wage at all; enable more, not less, part-time workers without benefits; and actively promote legal barriers and public opinion against organized labor. Wage earners who insure their destiny through the sycophants of corporations need to understand that meritocracy immigration is a corporate-selected COMPETITION INTO ALL domestic good jobs. Today's citizens will find equality in that THEY ALL CAN BE DEALT-OUT by corporations who will choose to pay less to these well-educated foreigners. The economy will grow, but our tech worker salaries will stagnate.

Why would a company that is already profitable, use the money from the tax cut to add employees and equipment, or give more to the employees when it does not have to? As we know these can be treated as extra profits, and either put in the companies reserves of buy back its stocks and bonds. Buying back the bonds gives a company mere liquidity, allowing it to survive an income downturn. But it does noting for increasing employment which was the excuse used by the Republicans who hashed the TCJA out in private hearings with no expertise, no testimony of pros and cans. This was just an ideological proposition long held by the GOP as a truth. What it does do is reduce the governments income, which means cuts in spending, in particular on regulatory agencies, a long time aim of the GOP. The GOP's propaganda machine has for years told us that these regulations are the work of left wing politicians and cos jobs and money. When the fact is those agencies were from the work of activist and concerned citizens who wanted things like clean air and water, job safety, proven drugs, unspoiled meat and vegetables, restrictions on credit and banking scams, and more. The Republicans only want profits, the are all important, you health and safety is not their concern, it costs their supporters money, and they can not have enough to satisfy their wants, so you are going to pay for them.

OK, Dr. Krugman. I enjoy reading your columns and as a non-economist I try to follow the wonk-ish ones as best I can. However, as one who just retired from a career of reading scientific journals, it drives my crazy when you present graphs without a legend - or even without adequate labels on the axes. I'm betting there are others out there thinking the same thing. Please, educate us by defining more specifically the terms in your graphs!

ther used to be a guy with a folding table on the sidewalk in Herald Square, taking bets on a switcheroo involving three cups and a walnut, that seems to amount to much the same thing as what you describe. so, prof, do top American business execs really sit around trying to figure out new and sneakier ways to avoid paying taxes instead of new and better ways to make money by selling their products and services? is that what they teach in MBA programs?

The conclusions of article is are deeply relevant to voters, our economy and our national interests. But like so many national debates, it is based on what the corporations (including the media) wants you to hear. I noticed the story of the Caravan miraculously got resolved (or shelved until the next election cycle). Meanwhile, things of real consequence to voters will never get widely circulated, and it's not just the tax cuts. I can mention ACA, infrastructure, pension liabilities, aging population, and most of all, Climate change. Instead, we are distracted by Trump trantrums, and Republican hypes (Hillary's e-mails, Benghazi, Loretta Lynch...) And quietly, the GOP and the Corporate media help elites to continue rigging the economy.

"stock buybacks should raise the price of the stocks remaining?" Really? A tax cut raises the value=price. Doesn't a buy-back simply restore the leverage without changing value? Assuming overall market pricing of cash-returns and risk-returns is unchanged.

Everyone knew that this tax cut wouldn’t promote investment in the USA. If a decade of record low interest rates at the same time that corporations were buying back record amounts of stock couldn’t promote investment then not even free money, which this tax cut was, could promote investment.

Why would we rely on the financial judgment of a bankrupt? or of a political party that fostered the Great Recession? We can't afford national health, but we can afford endless war. It's time to reset our fiscal priorities so taxes are fairer and the public gets the biggest benefit of government spending.

But the tax cut did create a big change in the national deficit....UP

I really don’t see why you think “promoting capital inflows was at the heart of [a] halfway reasonable argument for the tax cut” when the argument is based on a model that “provisionally (and wrongly) assume perfect competition, [and that] this marginal product will also be the rate of return on investment.” This argument presumes that savings, somehow, creates investment which makes no sense at all: http://www.rweconomics.com/htm/Pro.htm

Grifters are going to grift. A big fat tax giveaway to the richt that instead could have been used for better health care or lower taxes for the working class. We pay a lot of taxes here in the Netherlands. In return we ensure that no one is left behind. There is accessible health care, jobs, and a well functioning government that hardly has corruption and serves the people, as it was meant to do. We have our problems here as well, but they are nothing compared to the corruption, hatred and lying of your government and president. I hope the Democrats will work on making live better for the 99%. And in 2 years from now, who knows. Maybe a little sanity.

Even Republican voters didn't like the tax cuts for the rich (read corporations), but still voted for them anyway indirectly. We can't kill K-12 over decades and expect to get rational voters. Need to factor that into the balance sheet.

The tax bill only makes the top 0.1 of the richest and ultrawealthy foreign investors richer. It was meant to reward gop donors and the incredibly corrupt trump family. Anybody else committing such massive tax fraud like trump and his family members would get hit with huge fines and long prison terms. He is using his xenophobic, white nationalist and white supremacist party as a shield. The salt deduction limit has raised taxes on many homeowners in ca, new jersey and other states. The stock market is down and bonds are down. Only 50 percent of americans own stocks and bonds. Their retirement savings are down. My 78 year old aunt has little savings in her ira and it is going up and down every week. Mostly down lately. The deficit is 21 trillion. A global slowdown is looming with export oriented china and germany struggling. Eventually taxes will go up for everybody or entitlements will get cut. Amazon chose ny and va. The tax bill does nothing for rural areas. Businesses prefer cities with big pools of educated and skilled people. The tax bill is a failure

Excellent... Jeff Madrick

"the TCJA played almost no role in the midterms" That's not true. This NYT by Ben Casselman and Jim Tankersley https://www.nytimes.com/2018/11/09/business/economy/economy-election-trump.html states that four Republican members of the House Ways and Means Committee lost their seats. They include Peter Roskam, IL-3, one of the architect of the TCFA. He lost his seat, in some part, because of the SALT deduction limit. You cannot financially attack your constituency without some pushback.

Make America Great Again! By giving tax breaks to foreigner investors, and then borrowing money to the same foreigner investors to pay for it. Are you tired of winning? The foreigner investors are not.

Sorry for the very non-wonkish comment: You can't legislate morality. All of your technical analysis documents just one thing. People love money and will do whatever it takes to have money. As you predicted, the tax cut did not result in more money for Main Street, just more money for Wall Street. As you predicted the majority of the savings went to stock buybacks, not salary increases. As you predicted it will blow a hole in our deficit, and make it harder for the 99%.

The Tax cut of 2017 had two essential objectives. First, lowering taxes for the most wealthy, mostly republican campaign contributors. The second, more sinister objective is reducing federal revenues to the point where scaling back or the outright elimination of social security, medicare and other publicly funded programs then appears to be the most logical remedy to address the burgeoning federal deficit which is now coming our way.

How does this interact with the trade war? Is it possible that the trade actions (including more aggressive actions against foreign investment in national security grounds) simply reduced foreign investment in the US by roughly the same amount that the tax cut increased it, so it comes out as a wash even though the marginal impact of the tax cut was positive?

Krugman's analysis of the effects of tax cutting have been based on a very nice simplified model in which the US is a small open economy where the cost of capital is based on the world price. While Krugman has been forthright in pointing out these simplifications, it would be nice to see the question of tax cuts analyzed with other possibly relevant simplifications. For example, I could imagine advocates of tax cuts arguing that, while large US corporations are very much embedded in an open, global economy, other parts of the US economy behave more as if they are embedded in a closed economy. In particular, a US resident contemplating starting a new small business with his own savings as initial equity does now have greater incentive to start that business, precisely because the tax cut is a give-away to holders of equity in US corporations, and that give-away persists precisely because global capital has not flooded into the US, as Krugman has explained. It is often said that small business formation is an important part of the US economy, and it would interesting to see if an analysis of the effects of a tax cut on this segment.

There was never any mystery about the Trump "Tax Reform", or it's intended effects. All along, from the very start, it was designed and intended to reward Republican donors for their campaign donations (I'd call they bribes, but my Mom thinks I'm too cynical). The wealthy are the great majority of donors to Republican politicians at all levels - there's not a lot of 'middle class' and working people who can donate $ thousands to politicians, and when they do decide to donate $25 or $100, it probably goes to Beto and not Ted Cruz... As designed, the Trump "Tax Reform" has worked brilliantly - corporate tax revenues have dropped sharply, and, entirely coincidentally, share buybacks have increases. Dividends have increased. Wages are going up, but it would be interesting to see if that is an effect of "Tax Reform" or just a tight labor market. Deficits have grown significantly, but that is OK because 'Reagan proved deficits only matter when Democrats are president'. As a giveaway to the wealthy and big corporations, Trump's "Tax Reform" worked brilliantly. And there a few sweeteners in there for real estate developers and investors, entirely by coincidence too, I'm sure. That whole estate tax repeal isn't hurting the wealthy any, either, is it Don Jr.? No, no mysteries to Trump's "Tax Reform"... and probably no Nobel for figuring that out, either. But good work anyway, Paul. Thanks, as always.

The inflowing capital has to be invested (turned into "capital stock") to increase production and possibly wages (although wage increase has been detached from production increase since the 70's). But demand, though relatively good at the moment compared to 2009, is not sufficient to justify a great deal of investment to expand production, especially when there are so many ways to make money through financial manipulation. That demand does not grow can hardly be surprising when wages are not growing. In other words, this is another failure of supply-side economics. This also applies to making the cost of investment capital cheaper through reducing interest rates. It also applies to the supposed benefit of capital inflow from running trade deficits. The country has got to get away from trickle-down economics, which includes expecting the Fed to stimulate investment by interest-rate manipulation.

While Paul Krugman may be able to tell us that models and reality are not always closely linked and why he should also tell us that the people making the decisions most often don't care when it comes to keeping their richest donors happy. This dance was not invented by the GOP or the Democrats. It's been going on for decades in America and probably for centuries in the rest of the world. The dance is how to pay enough in taxes to keep the government off the corporations collective backs while hanging onto as much as possible to enrich the corporation itself (not the employees). The distortion comes in when people believe that corporations shouldn't have to pay too much in taxes. I fail to see why they shouldn't pay the going rates. Corporations spend a small fortune on an army of people to avoid paying taxes. That money could be put to much better use: paying employees more money, investing in employees, giving back to the communities whose infrastructure they use, etc. I fail to understand why it's the mark of a smart corporation or person to cheat the government of money it needs to function.

Directors of corporations are legally bound to act in the best interest of shareholders. So why is anyone surprised when government policies that bestow riches to corporations in the hope of stimulating broad economic benefits only end up further enriching shareholders? As for the benefits flowing to foreign owners of US stocks, just give the US oligarchs another 5 to 10 years to fix that one by replacing public ownership of corporations with ownership by private equity.

It would be nice if Krugman had explained that the total taxation on corporate income is still very high, generally ~50%. Here's the math: Federal corp tax: 22% State corp tax: ~5 to 9% in states like CA, NY, IL etc. So all in at corp level at least 25% and in CA, NY etc. (where a lot of the income is generated) higher. So $100 in pretax income at corp level becomes ~$75 available after tax for dividends. Then Personal federal tax on dividends: 20% (for upper income) Medicare tax: 3.8% (on investment income over $200K) State income tax: ~5% to 13.3% in CA, NY, etc. where most rich people live and now not deductible for feds so full addidtive effect So personal tax rate on qualified dividends is ~33% so the $75 dividend becomes ~$50. This ~50% rate applies to most corp profit because as Krugman himself notes, almost all dividends flow to the wealthiest 10%. Also other than 401K etc, there are no loopholes that can shield this income. I don't think anyone would call a tax rate of 50% "the big giveaway."

Sadly, the people who really need to read this probably will not. In the era of Trump, fiction “trumps” facts. The Republicans might just start making up non-existent domestic investments. If Trump started tweeting about how corporations are putting up new offices and factories all over the US thanks to the tax cut, about 35-40% of the country will believe it to be true.

One additional point is that increased capital inflows, even if they do occur, don't necessarily lead to increased business investment. If foreigners buy US financial assets such as stocks, corporate bonds or US Treasury bonds, such transactions are all counted as capital inflows into the US but they don't necessarily result in increased investment in plant and equipment by US businesses. The TCJA not only reduced the top corporate tax rate but allowed businesses to deduct 100% of the purchase price of certain capital equipment, up from 50%. Not only that but the new law now allows used equipment to be fully expensed whereas previously only new equipment qualified. Despite this GDP data show that growth in fixed non-residential investment in equipment by US businesses has slowed markedly in every quarter of 2018 from 9.9% in Q4 2017 when 100% expensing went into effect to 8.5% in Q1 2018 to 4.6% in Q2 and just 0.4% in Q3, The lesson is that businesses don't make capital investments simply to get a tax deduction. There has to be a good business reason such as the need to boost productivity of their workers or to increase productive capacity to meet higher expected future demand for products and services.

I'm not an economics wonk and this column seems particularly wonkish, even by the standards of a Krugman column so defined. However, it would be easier to blame the GOP for manipulating the economy to the benefit of the investment class if Dems would be a lot clearer about how the economic system increasingly favors capital over labor. And went further to explain exactly how they plan to reverse this trend that has transferred so much of this country's and the worlds wealth away from workers to owners. Health care (apparently the BIG issue for Dems in the midterms) is important, but its expense and the proportion of workers salaries that go to pay for it is a symptom of the larger issue of the accelerating inequitable distribution of wealth in this country and around the globe. If Krugman it to be an effective advocate for working people it would be nice to see him focus on the specifics of this issue- wonkishly or otherwise.

Wow, so worth the several times reading that I needed to fully understand this analysis. The analysis is tremendous, the conclusion distressing as was intimated earlier. I am so grateful for this analysis, which I will offer to students.

You should note that there was a big tax cut on money already offshore that was due to be taxed at 35% and is instead taxed at 15%. This resulted in a one time bump of close to $450 billion for the fisc but at a long term cost of net $600 billion in giveaways that doesn’t show up in the $100 billion a year number. So more costly still and no incentive effects because that was a tax giveaway on money already earned (Apple alone got essentials a $40-50 billion gift)

The old "bricks and mortar" derogatory quip comes to mind, and the reality of forgetting that however nifty the virtual world may be, we all live in that bricks and mortar place where the food is consumed, etc. Thank you for specifying the difference between the model and the real world, particularly in noting not just the time it would take to make use of the capital (money) and actual capital (infrastructure) but that basic reality of investment qua investment. As Alicia Munnell of the Boston Fed(at the time) reminded often when speaking about the Social Security Surplus in the late 90s- the issue isn't the $s it's how they are invested that matters. The investments to which she referred take time to bear fruit, are "real", and not just accounting entries pushed here and there. Those other "investments" are just seeds for the next credit crunch.