How should tax plan be analyzed
The purpose of this blog entry is to seek opinion from economists and other experts in Alabama about the Trump/Republican tax cut plan.
To do this, I will set forth my analysis as a point of reference for expression of opinion by others.
My starting point is how the corporate tax cuts and related benefits of the tax cuts will pass through to "capital" and to "labor," respectively.
For "capital" the tax cuts and related benefits pass through in the form of increased dividends, stock buy backs and higher stock prices. For "labor" they pass through in the form of wage boosts and job creation.
This disagreement and uncertainty means "labor" has to wait to see how much wage growth and jobs creation will happen from the tax cuts.
Before touching on factors and circumstances, and uncertainties related to what "labor" will get, the significance of the stock market for "capital" needs to be indicated.
B. Stock market measure of what "capital" will get
In the investment universe, investors do their own projecting about what "capital" will get, and those projections (expectations) get reflected in stock market prices in advance of tax cuts going into effect and in advance of business growth actually taking place. Different investors may have different projections (expectations). Based on their respective projections (expectations), investors buy and sell shares of stock, and stock market prices are affected in an averaged way about those differing projections (expectations).
The full amount of what investors and their "capital" will get from the corporate tax cuts and increased corporate revenues resulting from business growth by reason of the tax cuts may not get immediately reflected in stock prices, and stock prices can continue to rise after the tax cuts go into effect and after there is business growth resulting from the tax cuts, and it becomes clearer what amounts "capital" will receive from the same.
The stock market is a form of a bank into which investors and "capital" can receive an early deposit of the value of the tax cuts and associated benefits, and investors and "capital" can cash out whenever they want by selling their stock.
C. "Labor" must wait to see what it will get
Stock market valuations are based on earnings, expectations about future earnings and about future growth that will contribute to future earnings, and which will flow to "capital" in the form of higher dividends, stock buy backs, and rising stock prices.
Wages, increased wages, and wages that are paid to new employees if there is job growth, are dollars that go to labor and not to capital. Expectations about increased wages or wages to be paid to new hires will not themselves be reflected in stock prices, although investors may project that there will be an association of the same with more going to capital. If the stock market valuation goes up, it is not measuring the increased amounts going to labor but only increased profits that happen along with the increased amounts going to labor and that gets received by capital.
Trump keeps bragging about the great stock market rise that has taken place since his election (about $4 trillion). What Trump doesn't say is that all of that belongs to capital, and it is uncertain what labor will get associated with the stock market rise.
The $4 trillion or so run up in the stock market since election day may be attributable to a number of factors affecting investor expectations about what "capital" will get. These factors include (i) Trump's loosening of regulations contributing to expectations business will be able to be more profitable, (ii) expectations that corporate taxes will be reduced and part of the tax cuts will be payable as dividends, and (iii) expectations of increased economic growth attributable to tax cuts, and of such growth further increasing corporate earnings which will redound to the benefit of "capital."
No one can say for sure how much of the $4 trillion or so run up in the stock market since election day is attributable to expectations of tax cuts and how much "capital" will receive from the tax cuts.
Further no one can say how much further run up there will be if the tax cuts are passed (or how much the stock market will fall if, for some reason, it appears that there will not be corporate tax cuts), and how much more will go to "capital."
All that being said, some of the benefits to capital of the tax cuts is already in the stock market bank for capital, and more may still get deposited in the stock market bank for capital.
What labor will get associated with the stock market rise is not in any bank for labor, it is very uncertain,, and labor must await the passage of time to see how much wage growth and job creation takes place.
E. Uncertainties about what "labor" will get; economic inequality
Since the 2008 financial crisis, much attention has been paid to growing economic inequality in the United States.
Kevin Hassett, Trump''s Chairman of the Council of Economic Advisors, recently recently made this comment, which sheds light on how that increasing economic inequality shows up in the stock market:
Over the course of the Obama administration, U.S. corporate profits rose by a healthy 11 percent per year. But workers’ pay didn’t keep pace, and median wage growth was a paltry 0.6 percent per year. This disconnect between profits and wages is a radical departure from previous economic norms. Workers used to get a 1.1 percent raise for a 1 percent increase in corporate profits. Now the passthrough to workers is closer to 0.4 percent. Why did it change so much? Because the profits are offshore, benefiting other nations’ workers. In 2016, U.S. firms kept 71 percent of foreign-earned profits abroad. What would happen if they didn't do that? A simple back-of-the envelope calculation suggests U.S. workers in 2016 would have received a raise of nearly 1 percent. What if these firms didn't do that for the next 8 years? The median U.S. household would get a $4,000 real income raise.
At this juncture of, in Trump's words, a "once in a generation opportunity" regarding tax reform, it would seem extremely important that the country get it right in diagnosing the reason for the "radical departure from previous economic norms". If that is diagnosed incorrectly, and the "radical departure from previous economic norms" continues, the tax cuts may indeed increase corporate profits but wages will continue to lag, and economic inequality will grow even greater.
With the rush through of the Trump/Republicans tax plan, it is fair to say that the American people have been deprived by the Republicans of thoughtful consideration by Congress of the very serious problem of economic inequality and what the government should do to address the same.
There are factors and evidence related to this that the Republican rush through has failed the American people on.
F. Some numbers
There are about 125,000,000 households in the United States, which, times $4000, yields $500 billion to labor.
That can be compared to the $4 trillion run up in the stock market since Trump's election, which belongs to capital. The $4 trillion is not due only to tax cuts, but is cited to be a measure of how much more economic inequality has increased under Trump.
G. Deficits and the national debt
H. What are the other choices
The country is not in a dire way in 2017 as it was in 2008. Things are going positively for the economy. It is not imperative that something be done in 2017 about taxes.
A good argument can be made that "capital" already has huge gains in the stock market bank resulting from expectations about the corporate tax cuts. With "capital" receiving such immense tax cut gains, and it may get more from the corporate tax cuts, and it could even be fair for a time to increase the individual tax rates of the rich to balance off the immense benefit to their wealth they have received and will receive from the corporate tax cuts (which they say are imperative to increase economic growth, boost wages, and create jobs for the rest of the country).
A different approach that would give more bona fides to the "good" intentions of Wall Street and the super rich would be doing tax cuts in the form of tax credits to corporations if there are increased payrolls (from wage boosts and new jobs). In other words, instead of guaranteeing their cash in to Wall Street and the super rich, the proposition to them would be, "Ok you say tax cuts will boost wages and create jobs. Show us. Here are tax cuts you will get if you proceed with expand business activities that increase your payroll." This could be extended to tax credits of education programs undertaken by corporations to educate and train workers with skills that can contribute to greater productivity, wage growth and job creation.
[I expect I will revise the above as my solicitation of Alabama expert opinion proceeds]
Will Slaughter is a native son of Alabama who lives in Milwaukee. He is with Northwest Passage Capital Advisors, an asset manager focused on emerging markets debt. Will has tweeted the following regarding the Trump/Republicans tax plan.
Alabama Republicans should also vote for Doug Jones to punish the GOP Congress for its overall fecklessness, between failing to articulate a sensible health care reform agenda & a tax plan that will raise taxes for many wage earners.#DougJonesForSenate— Will Slaughter (@MilwaukeeBonds) November 13, 2017
@SpeakerRyan @SenateMajLdr @HouseGOP @SenateGOP you and your party are a joke and will face a reckoning from the voters you have betrayed https://t.co/o55Pd9yJC1— Will Slaughter (@MilwaukeeBonds) November 17, 2017
This is a table that the Senate GOP didn't want you to see. They were sitting on it for 2 days. It shows that over 80% (yup, 4 out of 5) of ALL households end up with a tax increase or get basically nothing from their so-called "middle class tax cut." pic.twitter.com/JhiNYjZ3Dk— Michael Linden (@MichaelSLinden) November 30, 2017
@SpeakerRyan @RonJohnsonWI if you insist on passing this dumb tax bill, which actually raises taxes on many working people in Wisconsin, I will look forward to supporting @SenatorBaldwin, @IronStache other WI Democrats in 2018.— Will Slaughter (@MilwaukeeBonds) December 1, 2017
A once loyal Wisconsin Republican
The bad policy, confused objectives, & craven sellouts to special interests embedded in the GOP tax plan demonstrate the ideological vacuity & economic ignorance of the Ryan/McConnell GOP long predated the accession of Donald Trump.— Will Slaughter (@MilwaukeeBonds) December 1, 2017
FWIW, here's an excerpt from my (apparently ignored) letter to @RonJohnsonWI explaining my opposition to the @GOP tax bill & pleading for a pro wage-earner approach instead:#TaxBill #GOPTaxPlan pic.twitter.com/KDE6HoOfzJ— Will Slaughter (@MilwaukeeBonds) December 1, 2017
I suppose I ought to be shocked at the degree to which @SpeakerRyan @RonJohnsonWI & the rest of the @GOP have sold out main street taxpayers to their Wall Street paymasters- but now is not the time to get mad, it's time to plan for electoral payback.#WeveBeenHad#TaxBill https://t.co/pwhVDz4gc7— Will Slaughter (@MilwaukeeBonds) December 1, 2017