Part 3 – New Gilded Age Defines This Economy!

So did reality correspond to the theoretical case made for the tax reform bill? We now have enough information to make a reasonably informed assessment. Unless you think that tax havens like Ireland, Bermuda or the Cayman Islands, all of which continue to feature as major foreign holders of U.S. Treasuries, have suddenly emerged as economic superpowers, the more realistic interpretation of the data shows the president’s much-vaunted claims about the tax reform to be bogus on a number of levels. Even though some dollars have been “brought home,” there remain trillions of dollars domiciled in these countries (at least in an accounting sense, which I’ll discuss in a moment). If anything, the key provisions of the new legislation have given even greater incentives for U.S. corporations to shift production abroad, engage in yet more tax avoidance activities and thereby exacerbate prevailing economic inequality. Which, knowing Donald Trump, was probably the whole point in the first place. This tax bill was constructed on a foundation of lies. To cite one obvious example, the real U.S. corporate tax rate has never been near the oft-cited 35 percent level. As recently as 2014, the Congressional Research Service estimated that the effective rate (the net rate paid after deductions and credits) was around 27.1 percent, which was well in line with America’s international competitors.

 

But here’s the key point: instead of investing in new plants and equipment, a large proportion of these dollars have instead been used for share buybacks or distributed back to shareholders via dividend payments. Anne Marie Knott of Forbes.com quantifies the totals: “For the first three quarters of 2018, buybacks were $583.4 billion (up 52.6% from 2017). In contrast, aggregate capital investment increased 8.8% over 2017, while R&D investment growth at US public companies increased 12.5% over 2017 growth.” So the top tier again wins in all ways: net profits are fattened, shareholders get more cash, and CEO compensation is elevated, as the value of the stock prices goes higher via share buybacks. The dollars, in other words, have only been “trapped” to the extent that corporate management has chosen not to deploy them to foster real economic activity. “Punitive” corporate tax rates, in other words, have been a fig leaf. But the American worker has derived no real benefit from this repatriation, which was the political premise used to sell the bill in the first place. Since the passage of the tax bill, the data show no significant evidence of corporate America bringing back jobs or profits from abroad. In fact, there is much to suggest the opposite: namely, that tax avoidance is accelerating in the wake of the legislation’s passage, rather than decreasing. Consider that the number of companies paying no taxes has gone from 30 to 60 since the bill’s enactment.

 

But it’s worse than that, as Setser highlights: “Well over half the profits that American companies report earning abroad are still booked in only a few low-tax nations—places that, of course, are not actually home to the customers, workers and taxpayers facilitating most of their business. A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary—taking advantage of Bermuda’s corporate tax rate of zero.” Again, the money itself does not make this circuitous voyage. These are all bookkeeping entries for accounting purposes. In another report, Setser estimates the totals in revenue not accrued by the U.S. Treasury to be equivalent to 1.5 percent of GDP, or some $300 billion that is theoretically unavailable for use on the home front.

 

Global tax arbitrage, therefore, runs in parallel with global labor arbitrage. That’s the real story behind globalization, which its champions never seem to mention, as they paint a story of worldwide prosperity pulling millions out of poverty. However, as I’ve written before, “a big portion of Trump voters were working-class Americans displaced from their jobs by globalization, automation, and the shifting balance in manufacturing from the importance of the raw materials that go into products to that of the engineering expertise that designs them.” During the 2016 election and beyond, Trump has consistently addressed his appeals to these “forgotten men and women.” Yet the president’s signature legislative achievement, corporate tax reform, suggests that his base continues to receive nothing but a few crumbs off the table. The tax reform also works at variance with the main thrust of his trade policy or, indeed, his restrictionist immigration policies (and it’s questionable whether these forgotten voters are actually deriving much benefit from those policies either). Not for the first time, therefore, the president’s left hand is working at cross-purposes with the right. The very base to whom he continues to direct his re-election appeals get nothing. And the country as a whole remains far worse off as a result of his policy incoherence and mendacity.

The White House projects that the federal deficit will surpass $1 trillion this year, the only time in the nation’s history the deficit has exceeded that level, excluding the four-year period following the Great Recession. “The 2019 deficit has been revised to a projected $1.0 trillion,” the White House Office of Management and Budget (OMB) wrote in its midyear review. As a candidate, President Trump promised to wipe out not only the deficit but the entire federal debt, which has surpassed $22 trillion. Republicans cast aside projections that their 2017 tax reform law would add $1.9 trillion to the deficit over a decade. Larry Kudlow, the top White House economic adviser, claimed just last week that the tax cuts were on track to pay for themselves.

Spending has also shot up as a result of bipartisan budget deals, in which Republicans sought massive increases in defense expenditures and Democrats sought equal increases on domestic priorities such as health care and education. Leaders of the Democratic-controlled House and Republican-controlled Senate and the White House are again in discussions to increase spending ahead of fiscal 2020, which begins Oct. 1, and a looming deadline to raise the debt ceiling. Budget hawks noted with dismay that the rising deficit was taking place at a time of strong economic growth, when economists say fiscal policy should be more restrained. “The midsession review is just the latest reminder of the dangerous fiscal path that we’re on — and it drives home the point that we are missing a valuable opportunity to start managing our debt during a time of growth and high employment,” said Michael A. Peterson, CEO of the fiscally conservative Peter G. Peterson Foundation.

The U.S. economy is hitting all sorts of records: lowest unemployment in decades and longest consecutive job growth. The economy is so hot that firms claim they can’t fill open jobs fast enough and corporate profits are soaring. Also reaching an all-time high: income and wealth inequality. So what gives? Despite decades of stagnating wages and stalled-out compensation benefits, the fact that there are more job openings than unemployed people has become a commonly used proxy to illustrate why workers lack the right skills employers seek. Predicated on the “skills mismatch,” expanding individual training and credentialing programs have become the perceived silver-bullet solution to helping workers get ahead in a good economy. The problem is, having a good job means more than just being matched to any job, and pushing workers to upskill won’t solve growing inequality. Even when unemployment peaked at 10.1 percent during the Great Recession, fingers also pointed to worker’s skill sets as falling short against employers’ desire for certain qualifications. But upholding a skills narrative that places the onus of employment on the shoulders of workers not only lacks relevance for those facing the greatest barriers to employment, but also limits mobility and risks exacerbating an already record-high economic inequality.

 

Putting these complexities into context, it’s time for a bold shift away from the singular skills story to one in which employment risks and insecurities generated during economic change are shared equitably by everyone who has a stake in economic success. This means that all workers should be afforded the right to quality workforce training options and transition support into good jobs, regardless of whether they are new to the labor market, currently in a job, or considered a contingent employee. The best way to do this would be to establish a dedicated trust fund to build and sustain resources for workforce and employment equity. Rooted in joint cooperation and mutual benefit, representatives of workers, employers and the government would share responsibility in overseeing this trust designed to advance equitable employment opportunities as a key mechanism to building workforce competitiveness. Specifically, it would do away with old, ineffective workforce strategies by designing elements most essential to help measure how much structures and policies mitigate — or reinforce — employment bias, while also increasing understanding of how current job training and workplace practices keep many people from getting more education or increasing earnings. And critically, the trust would employ mechanisms that protect against discrimination in the labor market. 

 

And for those corporations sweating the tax, higher receipts and larger firms would be able to absorb this relatively tiny cost by investing in the future as all businesses adapt to a changing workplace. Businesses would benefit through increases in productivity and decreases in turnover from affirmatively investing in all workers, and through these contributions they also play a critical role in sharing the responsibility of improving workplace standards. This would improve job quality and contribute towards building a more equitable and stable economic system — as opposed to merely training and matching workers to any job. When it comes to increasing levels of inequality, ensuring everyone the right to quality training and employment just might be the change needed to break this record.