tax cuts

President Trump signed the Republican tax cuts into law roughly six months ago, but the benefits promised to American workers seem to have been forgotten by the Trump administration.

On January 31 — a month after the Tax Cuts and Jobs Act went into effect — the White House issued an aggregation of carefully selected news articles touting the success of the legislation. Stories from the Wall Street Journal, USA Today, Washington Examiner, the Memphis Commercial-Appeal, and the Milwaukee Journal-Sentinel were all included in the release, and the overwhelming tone of coverage at the time was that workers were sharing in the benefits of the latest round of corporate tax cuts.

Most of the positive stories involved companies deciding of their own volition to give workers a one-time bonus attributed to the tax cuts. Although companies actually ended up investing a bulk of their savings not in their workers’ pay, but in buying back shares of their own stock — thus driving up the value of the options owned by corporate executives.

CBS Moneywatch recently reported that, according to one measure of worker pay, average pay in the second quarter of 2018 was actually one full percentage point lower than it was in the first quarter of the year. In the meantime, companies are setting new records in stock buybacks:

Businesses are spending nearly $700 billion on repurchasing their own stock so far this year, according to research from TrimTabs. Corporations set a record in Q2, announcing $433 billion worth of buybacks — nearly doubling the previous record, which was set in Q1.

When a company buys back some of its outstanding shares, the effect is usually to boost the value of the rest of its stock, sometimes making the company appear more valuable on paper. Because many senior executives are paid in company shares, buybacks temporarily boost their pay (as well as other shareholders’ portfolios), sometimes at the expense of investments in infrastructure or workers.

However nice the one-time bonuses companies voluntarily awarded to workers were, workers are poorer now than they were before the tax cut was passed, and that’s all thanks to the tax cuts and inflation, which is now at a six-year high — meaning anything workers gained in their paychecks has been wiped out by higher costs of living.

The way the tax bill was designed, numbers were fudged in order to making it appear as if more Americans were moving into higher tax brackets (thus creating an on-paper justification for more tax cuts in the future, as President Trump has suggested). Through the use of a chained consumer price index (CPI) to determine when to adjust tax brackets and eligibility for various deductions, the Trump tax cuts bring in an additional $134 billion in new tax cuts over the next decade, according to NPR.

But as former Harvard Business Review editor Justin Fox wrote for Bloomberg last year, the chained CPI will inevitably lead to higher and higher taxes that will disproportionately hurt working-class Americans. Even though taxes will increase by just $800 million in 2018 due to chained CPI, the increase will be as much as $31.5 billion over the next ten years — most of which will conveniently miss the top tenth of the top one percent of income earners (emphasis ours):

[B]ecause of the way tax brackets work, the tax increases brought on by chained indexing will be bigger in percentage terms for those near the bottom of the income distribution than for those at the top. According to a 2013 analysis by the Tax Policy Center, taxpayers in the second income quintile (currently those with cash incomes of $25,000 to $48,600) would see the biggest percentage increases, with their tax rate going up by 0.4 percentage points and their after-tax income declining by 0.4 percent 15 years after a switch to chained CPI. Meanwhile, those in the top 0.1 percent of the income distribution (incomes above $3.4 million) would see average percentage changes of effectively zero.

Because a chained CPI makes it politically convenient for lawmakers to be able to continue to pass additional tax cuts while simultaneously increasing spending on government programs (like the $700 billion military budget Trump signed into law around the same time as his tax cuts), it isn’t likely it will be repealed anytime soon without direct action from Congress.


Logan Espinoza is a freelance contributor specializing in economic issues. He lives in Phoenix, Arizona with his wife and daughter. Contact him at logan DOT espinoza AT yahoo DOT com.

Leave a Reply

Your email address will not be published. Required fields are marked *