Goldman’s Take on Trump’s Corporate Tax Cuts

According to two rather skeptical commentators at Yahoo Finance video last week, Goldman Sachs’ take on how Trump’s corporate tax cuts might work goes like this:

(1) The statutory corporate rate of 39% would drop to the actual rate of 28% paid after companies use tax loopholes; then continuing to use tax loopholes corporations’ actual tax rate will drop to 15%. The result?

(2) Companies that pay way less taxes would make way more profits. And?

(3) Corporations would return those profits to shareholders through stock buy-backs and dividends as the stock market rises as a result. Likewise, overseas profits would come back to the US at 10% tax, and the result would be:

4) Shareholders would get and spend a lot more money.

I see the major problem with this reasoning is, shareholders are not individuals.

Most shareholders are corporations such as banks and insurance companies, governments on all levels, pension funds, hedge funds, foreign entities, and other large institutions.

Institutions don’t go walking out and spend money in your neighborhood.

Nor do these institutions create many new jobs. Institutions and corporations tend to invest money in order to make money to pay back their own clients as well as make a profit for shareholders, if any, and themselves.

Likewise, even individual shareholders tend to be saving for the future, not spending right now.

Consumers are the ones who actually spend money. This money creates demand for more products and services here and now. Small businesses are the ones who often supply services to those consumers. Our US service sector makes up 70% of jobs that Americans hold.

But here’s the mess Martin Wolf of the Financial Times sees US consumers, workers, and small businesses in:

Workers have not only suffered from declining shares of the pie [by over minus 4% of GDP during this century]. Just as significant is the steady rise in the proportion of men aged 25 to 54 neither in work nor seeking it from about 3 per cent in the 1950s to 12 per cent now…

This increase in the number of jobless prime-age American men since 1990 has made the US the second-highest jobs-loser among the thirty-five developed countries in the OECD (Organization for Economic Development). And it’s not just men having trouble:

After 2000, the declining trend in non-participation of prime-age women also halted. The proportion of US women…[age 25-55] in employment is now among the lowest of all members of the OECD.

Staying competitive in a global world

Joblessness and growing wage declines in the United States are not a new problem – they are a long-term trend, getting worse.

New technology has created a long-run crisis for American workers. The Internet, in particular, has brought us into a global society of communications and production.

Manufacturing jobs have left this country because unskilled American workers cannot compete with robotic arms along with more skilled and less expensive foreign workers abroad. Yet, American education has not kept up with our need for skilled technical labor.

American workers and the unemployed are now the consumers flocking to dollar stores to buy foreign products in droves. In his 2013 documentary film “Income Inequality for All,” Robert Reich speaks as though these consumers have a choice, but they do not. Cheap imported goods are their only means left for coping with low wages and lack of disposable income.

The problem for corporations in regard to Trump’s corporate income-boost plan is that in the past, tax breaks on corporate income have not resulted in corporate income being brought home to create new jobs. To the contrary, when the US had its highest statutory corporate tax rate, 52.8%, unemployment was at its lowest, i.e., 3.6% and 3.5% in 1968 and 1969.

Currently the going rate abroad for corporate taxes on foreign corporations in other developed countries is around twenty percent. On paper a ten percent US rate looks better. But money invested abroad still has many advantages.

Better infrastructure, less expensive and more skilled workers, and already-existing manufacturing facilities are obstacles to change. Money can be transferred at the touch of the button. These other things cannot.

There was a note of skepticism in the Yahoo Finance video commentators about the likelihood of foreign corporate income tax repatriation to the U.S. that needs to be heard.

Robotic devices in manufacturing are not going away either. Joblessness and wage erosion in this country is a systemic, long-term problem for consumers and small business.

We need to be talking now about long-range solutions. Liberal economist Robert Reich suggests more labor unions, but these groups cannot compete with the changes modern technology has wrought for workers.

Robotic devices don’t go walking out and spend money in your neighborhood  either. Robots don’t create jobs – they can only create more robots and eliminate more jobs for humans.

Oddly enough, the only thoughtful people I’ve found willing to suggest a possible remedy, i.e., a basic income guarantee for all Americans, are libertarians at the conservative Cato Institute. These thinkers argue that the U.S. welfare state spends too much and spends it badly.

Yet, the only suggestion current U.S. politicians can come up with is a short-term one – a return to the past that worked in the 1930’s, but will not suffice today.

Next time: Trump’s New ‘New Deal’ Isn’t Enough















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