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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, January 27, 2018

NY Times: Bonuses Aside, New Tax Law’s Trickle-Down Impact On Workers Is Not Yet Clear

New York Times, Bonuses Aside, Tax Law’s Trickle-Down Impact Not Yet Clear:

There are good ways to start measuring how much the Trump tax cuts might be helping American workers. Tracking the bonus announcements flowing from corporations is not one of them.

Those announcements, which include $2,500 in stock grants for Apple employees, up to $1,000 for certain workers at Walmart and $1,000 bonuses for Bank of America employees, are both real money and smart marketing. President Trump and top Republican lawmakers have praised many of the companies that are disclosing tax-cut-fueled bonuses and wage hikes.

For the most part, though, they are not indicative of the windfalls that companies are reaping from the $1.5 trillion tax law — and how much of that money that might trickle through to workers in the years to come.

Companies are acknowledging this in their fourth-quarter earnings reports and other financial disclosures, which earmark just a sliver of their future tax savings for direct and indirect investments in workers.

Bank of America’s bonuses will cost the bank $145 million in 2018, or about 5 percent of the nearly $2.7 billion in savings it is expected to reap in 2018 from a lower, 21 percent corporate tax rate. Apple’s bonuses will cost $300 million, a fraction of the $40 billion, at least, that the tech giant is saving from a single provision in the law, which allows it to return earnings held overseas at less than half the rate it would have paid under the old system. ...

The gap between what companies are saving and how they are, so far, rewarding workers, doesn’t mean that the new law won’t eventually lead to substantial wage increases. Economists across the political spectrum agree it’s simply too soon to tell whether — and to what degree — that will happen.

The flurry of high-profile bonus announcements “are hard to interpret,” said Mihir Desai, an economist at Harvard Business School and Harvard Law School whose research supports the idea that corporate tax cuts lead to at least modest wage increases. “They may well be evidence for these gains, but just as well may be an example of savvy public relations. The reality is we’ll have to wait for a few years and good empirical work to really know the answer.” ...

Republicans predicted the majority of the corporate tax cut would eventually trickle down to workers through investment, jobs and wage increases. At one point early in the tax debate, the chairman of the White House Council of Economic Advisers, Kevin Hassett, said that workers would enjoy the majority of the benefits from a corporate tax cut.

The theory is investment in structures, equipment and other initiatives, either by companies or their shareholders, boosts productivity in companies, and with it, wages. It is a bank-shot theory of wage growth, and one that many economists espouse, though often to a much lesser degree than Mr. Hassett, whose research suggested typical workers would see an increase of between $3,000 and $7,000 in take-home pay.

“The theory that tax cuts will increase wages is a theory based on investment, and the effect that increased investment will have on productivity,” said Michael R. Strain, an economist at the conservative American Enterprise Institute. “It is not a theory based on a pure transfer of excess profits into workers’ profits. That takes longer than two weeks to happen.”

Anecdotes of bonus payments, or even minimum wage increases, are the least-useful way to determine if a tax change is lifting workers, said Scott Greenberg, a senior analyst at the Tax Foundation in Washington. The best way is rigorous academic study, which Mr. Greenberg noted takes years to complete.

The middle ground between those two is watching economic indicators — the rate of investment growth in the economy, or of real wage growth.

But even that will prove tricky in the months to come, because the economy was strengthening even before the tax cut. Most economists believe the United States is now at or near so-called full employment, when employers are forced to compete for scarce workers, and employees are empowered to bargain for higher wages, whether their companies just received a tax break or not.

http://taxprof.typepad.com/taxprof_blog/2018/01/ny-times-bonuses-aside-new-tax-laws-trickle-down-impact-on-workers-is-not-yet-clear.html

Tax, Tax Policy in the Trump Administration | Permalink

Comments

"Bonuses aside..."

That says it all!

Posted by: MM | Jan 29, 2018 2:06:08 PM